Answered: One of Rose’s suppliers, Powder Bhd,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

One of Rose’s suppliers, Powder Bhd, had adverse publicity due to the issue of cleanliness of its factory. On 1 September 2019, Rose Bhd decided to terminate the contract with Powder Bhd. The contract will expire in 8 months time. According to the contract, the cost to fulfill the contract is RM160,000 per month. It is also stipulated in the contract that Powder Bhd can accept a compensation of RM1,400,000 if the contract is terminated more than 6 months before it expires.

Required:
For each of the events above, explain whether provisions should be recognised in accordance with MFRS 137 Provisions, Contingent Liabilities and Contingent Assets.

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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