Question

Jones Co, manufactures a range of products. At 31 December 20X0 it has been notified of the following claims:

(i)	It faces 100 claims in respect of product Alpha. The company's past experience indicates that 30% of the claims will be successfully defended. 70% will probably need settlement and rectification at a cost of $100,000 per unit
(ii)	It also faces a single legal claim for product Beta. The company's legal advisers have indicated that the claim has a 30% likelihood of success and a 70% likelihood of failure. The cost of failure would be $1,000,000.

Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets what provision, if any, should be made in the financial statements?

NIL

$7,700,000

$8,000,000

$11,000,000

Answer 1

Those claims who have a ceternity of getting anticipated in advance are needed to be recorded in advance as contingent liabilities.

In this case total contingent liability would be-

1. In the case of product Alpha 70% of the claim would have to be recognised because it has ceternity of settlement and rectification of cost at

($ 100000*70%)= $ 70000

2. In the case of product beta the product has 70% of likelihood of failure and it is to be recorded at (10,00,00*70%)= $ 700000

As the total contingent liability would be

=[70000+700000]

=7,70,000

Hence the correct answer is option (B)$ 770000