Page 449 - F2 Integrated Workbook STUDENT 2019

Answers

Chapter 8

Example 8.1

Answer

C – A liability of $1m will be recorded and a contingent asset should be
disclosed in a note to the financial statements.

Claim against Axe Capital

A provision will be recorded if:

 An obligation exists

 A probable transfer of economic benefit will occur

 The amount can be reliably estimated

A legal obligation would exist if Axe Capital loses the case.

As Axe Capital has a 30% chance of not paying damages, then there is a 70%
chance they will have to pay damages. A probable transfer of economic benefit
will occur.

Therefore, a provision for the potential damages will be recognised.

Counter claim by Axe Capital

The counter claim against a supplier creates an uncertain asset. Uncertain
assets will only be recognised if virtually certain. A contingent asset will be
disclosed if there is a probable receipt of economic benefit. As a result the
$300,000 counter claim should be disclosed as a contingent asset.

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