Question

XYZ Company is involved in ligtigation that their lawyers think it is 55% likely that they will lose. The estimates of loss are: 30% for a loss of $100,000 and 60% for a loss of $400,000. How much should XYZ record as a provision related to this, assuming they will record a provision?

Answer 1

Answer:

$270,000

Explanation:

Provision should be recorded when there is present obligation and reliable obligation available for the event to be recorded as provision.

Value of provision is based on the loss value of litigation.

Estimated value of Loss

Value         Estimate

$100,000     30%

$400,000    60%

Expected loss = ( 100,000 x 30% ) + ( 400,000 x 60% ) = $30,000 + $240,000 = $270,000

As there is 55% possibility of loss, then $270,000 will be recorded as provision.