Jeffers Co prepares financial statements for the year ended 31 December 20X8. The financial statements are expected to be authorised for issue on 15 March 20X9.
The following three events have occurred in January 20X9:
(1) Health and safety fine
A health and safety investigation of an incident which occurred in 20X8 was concluded in January 20X9, resulting in a $1·5m fine for Jeffers Co. A provision for $1m had been recognised in Jeffers Co’s financial statements for the year ended 31 December 20X8.
(2) Customer ceased trading
Notice was received on 10 January 20X9 that a customer owing $1·2m at 31 December 20X8 had ceased trading. It is unlikely that the debt will be recovered in full.
(3) Acquisition of a competitor
The acquisition of a competitor was finalised on 10 January 20X9, being the date Jeffers Co obtained control over the competitor. Negotiations in respect of the acquisition commenced in May 20X8.
In addition to this, there is an outstanding court case at 31 December 20X8 relating to faulty goods supplied by Jeffers Co.
Legal advice states that there is a small chance that they will have to pay out $6m, but the most likely outcome is believed to be a payout of $5m. Either way, Jeffers Co will have to pay legal fees of $0·2m. All payments are expected to be made on 31 December 20X9. Jeffers Co has a cost of capital of 10% (discount factor 0·909).
Jeffers Co believes the fault lies with the supplier, and is pursuing a counter-claim. Legal advice states that it is possible, but not likely, that this action will succeed.
3. What amount should be recorded as a provision in respect of the outstanding court case against Jeffers Co as at December 20X8 (to the nearest hundred thousand)?
A $5·6m
B $5·5m
C $4·7m
D $4·5m
4. At 31 December 20X8, which of the following represents the correct accounting treatment of the counter-claim made by Jeffers Co against the supplier?
A Nothing is recognised or disclosed in the financial statements
B Disclose as a contingent asset
C Recognise a receivable from the supplier
D Net the possible counter-claim proceeds from the supplier against the provision for legal claim
5. In February 20X9, a major fire broke out in Jeffers Co’s property and warehouse. Jeffers Co has no insurance, and now the management of the company believes it is unable to continue trading.
How should this be reflected in Jeffers Co’s financial statements for the year ended 31 December 20X8?
A No adjustment should be made to the figures in the financial statements, however, this event must be disclosed in the notes
B The financial statements can no longer be prepared on a going concern basis
C No disclosure is required in the financial statements, however, this event must be reflected in the financial statements for the year ended 31 December 20X9
D The financial statements should continue to be prepared using the going concern basis, with an impairment loss recognised against the non-current assets
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