Reference no: EM132762763
Ake Ltd is preparing financial statements for the year ending 31 December 2019, and has the following situations that its directors are considering for potential provisions:
[Scenario 1] At its year end, 31 December 2019, Ake Ltd is battling a continuing (as yet unsettled) court case. Ake's solicitor's legal fees of £3,000 (for work done up to 31 December 2019) remain unpaid at that date. The solicitor estimates that there is a 55% chance that it will be found liable, in which case it will have to pay a fine of £10,000.
[Scenario 2] Ake plc sells goods with a 1-year repair warranty. If minor repairs were required for all goods sold in 2019, the cost would be £80,000. If major repairs were required for all goods sold in 2019, the cost would be £400,000. The directors estimate that 85% of goods sold in 2019 will have no defects, 10% will have minor defects and 5% will have major defects. During the year Ake spent £10,000 on warranty repairs on goods sold in the year.
[Scenario 3] Ake has a second (unsettled) court case where it is being sued for £1 million in a libel action in respect of a personal injury sustained from using one of its products in January 2019. On 31 December 2019, the directors believed the claim had a 10% chance of success. By 31 January 2020, when the accounts were authorised for issue, the directors believed the claim had a 30% chance of success.
Problem 1: What should the total provision be (for all THREE of the above scenarios)?
A £0
B £23,500
C £28,000
D £31,000
E £41,000
F £123,500
G £128,000
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