can someone explain how to do this please? Question 4 Cero Limited received noti

Question

can someone explain how to do this please?

Question 4 Cero Limited received notice that a $1 million lawsuit had been lodged against it by an employee on June 20, 2014. The employee claimed injuries because he fell down a set of stairs on the company premises while he was working, indicating that the company does not comply with the required workplace safety guidelines. After investigation, the company's attorney believes that it is likely that the lawsuit against the company will be successful; however, there is some evidence of negligence by the employee. No date has yet been set for the trial. Cero Limited reporting period ends on 31 December 2014. Required a) Indicate how this event should be accounted for and disclosed in the financial statements of Cero Limited at 31 December 2014. that the lawsuit against the company will be successful? Limited when the decision of the court is known by the company? b) How your answer in a) change if the attorney believes that there is a remote possibility c) How this event should be accounted for and disclosed in the financial statements of Cero

Explanation / Answer

A) This is a case of contingent liability. If the attorney of company has investigated and believes that the case against the company will be successful then the company has to pay the amount to the employee. This is a expenses for company which has certainity to pay but the payment date was uncertain.

So the company has to made provision for this continget liability which will be charged to profit and loss account.The provision is made based on investigation made. if the data suggest that 100% claim has to pay then 100% provision has to made and disclose has to made in the notes of accounts.

profit & loss a/c ..Dr $ 1,000,000

To provision for lawsuit a/c $ 1,000,000

B)

if the attorney of company beleives that there is remote possibility that the lawsuit against the company will be successful then their is no need to create provision for lawsuit but a disclose has to be made in notes on accounts about the contingent liability.

C)

when the court decision is made then the actual expenses is realised and charged against the provision made earlier. if if 100% claim has to pay then 100% has to charged against provision.

for example the court decide to pay $ 800,000.

in this case the lawsuit was less than the provision so

provision for lawsuit a/c    ..Dr $ 1,000,000

To Bank a/c $ 800,000

To Profit & Loss a/c $ 200,000

for example if the court decide to pay $ 1,200,000.

in this case the lawsuit was more than the provision so

provision for lawsuit a/c    ..Dr $ 1,000,000

Profit & Loss a/c ..Dr $ 200,000

To Bank a/c $ 1,200,000

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