Question

XYZ Company is involved in ligtigation that their lawyers think it is 55% likely that they...

XYZ Company is involved in ligtigation that their lawyers think it is 55% likely that they will lose. The estimates of loss are: 30% for a loss of $100,000 and 60% for a loss of $400,000. How much should XYZ record as a provision related to this, assuming they will record a provision?

Show all computations and logic.

Business   Accounting   
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Answer #1

As per Accounting Standard " Provison, contingent Liabilties and contingent assets", Provision is to be recoganized when:-

1) There exist a present obligation arising out of the past event.

2) Realible estimates of the obligation can be made.

3) Expected that their will be outflow of future economic benfefits in settlement of such present obligation.

Therefore Provision for Contingencies to be made as per following:

1) 30% of 1,00,000 = 30,000

2) 60% of 4,00,000= 2,40,000

Total    = 2,70,000.

JOURNAL ENTRY.

Profit & loss Account Debit 2,70,000

To Provision for Leagl Claims 2,70,0000

(Being Provison made for legal claims.)

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