ACCA · Question 21 · Recording Transactions: Provisions and Contingencies
Section A
PharmaCorp is being sued by a competitor for patent infringement. PharmaCorp's lawyers advise that it is probable (a 70% chance) that PharmaCorp will lose the case and have to pay damages of $2 million.
How should this be treated in PharmaCorp's financial statements?
Answer options:
Disclose as a contingent liability only.
Recognize a provision for $1.4 million (70% of $2m).
Recognize a provision for $2 million.
Ignore it until the court case is finalized.
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