Provision

Prior to the financial year end of 31 July 20X9, Cannon Co has received a claim of $100,000 from a supplier for providing poor quality goods which have damaged the supplier's plant and equipment.

Cannon Co's lawyers have stated that there is a 20% chance that Cannon will successfully defend the claim.

• Accrual

• Provision

• Contingent Asset

• Contingent Liability

Answer explanation

It is highly probable since the company has 80% chance of losing the case.

A new mine became operational in February 20X6 and estimated cost of returning the site to its original condition was $250,000. There is no government rules that require the site to be returned to its original condition and Roberto has no published environmental policy on its website.

What is the accounting treatment?

• Do nothing

• Create provision

Answer explanation

Since there is no government rules and the company did not published any environmental policy, there is no present obligation from the past event and no probable outflow of benefits.

Drilling in a mine caused contamination to the local drinking water. Roberto Co was taken to court by the by the local government and at the reporting date it is possible that the company will have to pay compensation, but the court case it still proceeding.

What is the accounting classification?

• Accruals

• Provision

• Contingent Asset

• Contingent Liability

Answer explanation

The keyword is possible.

During the year, Poli Plc acquired a licence to operate a surface mine enabling it to extract raw materials from the ground. The licence to extract cost $15m and is applicable for 10 years at the end of which time Poli plc will have to restore the site to its former beauty and landscape to its former beauty and landscape it fully.

The present value of the estimated site restoration costs is $3m and will apply whether or not any raw material is in fact extracted

Whats is the accounting classification?

• Accrual

• Provision

Koroni plc has acquired a machine that will require a major overhaul costing $30,000 twice during the next 10 years of the machine's useful life. the present value of the overhauls id $42,000

• Provision

• No provision

Kalamaki plc has moved from its leased office premises to owner occupied premises. At the date of the move there was one year remaining on the lease but Kalamaki plc believes that the landlord will be able to lease the property easily so no liability will fall back on the entity.

• Provision

• No provision

Volos plc has for many years adopted a policy of site clearance whenever the entity has finished operations on that site. This exercise has proved expensive in the past but , being a socially responsible corporation, the directors of Volow plc are reconciled to continuing this practice even though there is no legal obligation on the entity.

• Provision

• No provision