Reference no: EM133174027
Questions - Q1. Read each of the statements below and Identify whether each would be a liability, a provision or contingent liability, or none of the above, in company A's financial statements as at the end of the reporting period of 31 st March 2021. Assume that company A's financial statements are authorized for issue on 31 May 2021.
(a) An amount of $35 000 owing to company Z for services rendered during Jan 2021
(b) Long-service leave, estimated to be $500 000, owing to employees in respect of past services
(c) Costs of $26 000 estimated to be incurred for relocating employee D from company A's head office location to another city. The staff member will physically relocate during July 2021
(d) Provision of $50 000 for the overhaul of a machine. The overhaul is needed every five years, and the machine was five years old as of 30th March 2021
(e) Damages awarded against Company A resulting from a court case decided prior to 31st March 2021. The judge has announced that the number of damages will be set at a future date, expected to be in September 2021. Company A has received advice from its lawyers that the damages could be between $20 000 and $7million.
Q2. In each of the following scenarios below; Explain whether Company G would be required to recognize a provision.
(a) As a result of its plastics operations, company G has contaminated the land on which it operates. There is no legal requirement to clean up the land, and company G has no record of cleaning up land that it has contaminated.
(b) As a result of its plastics operations, company G has contaminated the land on which it operates. There is a legal requirement to clean up the land.
(c) As a result of its plastics operations, company G has contaminated the land on which it operates. There is no legal requirement to clean up the land, but company G has a long record of cleaning up land that it has contaminated.
Q3. A customer filed a lawsuit against Company A in December 2021 for costs and damages allegedly incurred as a result of the failure of one of Company A's electrical products. The amount claimed was $3 million. Company A's Lawyer has advised that the amount claimed is extortionate and that Company A has a good chance of winning the case. However, the lawyers have also advised that if Company A loses the case, expected costs and damages would be about $500000. Discuss how company A should disclose this event in its financial statements as of 31 December 2021?