Question

Great Adventures is a defendant in litigation involving a biking accident during one of its adventure races. The front tire on one of the bikes came off during the race, resulting in serious injury to the rider. However, Great Adventures can document that each bike was carefully inspected prior to the race. It may have been that the rider loosened the wheel during the race and then forgot to tighten the quick-release mechanism.

For each of the following scenarios, record the necessary entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Required:

1. The likelihood of a payment occurring is probable, and the estimated amount is $121,000.

2. The likelihood of a payment occurring is probable, and the amount is estimated to be in the range of $101,000 to $151,000.

3. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $121,000.

4. The likelihood of a payment occurring is remote, while the estimated potential amount is $121,000.

Answer 1

Solution: - As per IAS-37: - (1) The liability is probable and reliable estimate can be made. Therefore, ‘provision for liability’ is to be recorded. Profit and loss: $ 121,000. To provision for liability: $ 121,000. (2) The liability is probable, but outflow of liability is estimated between the range of $ 101,000 to $ 151,000. Therefore, the minimum liability is to be recorded as liability under provision (IAS - 37) and the range of liability is to be disclosed in ‘notes’ to financial statements.