Your managing director is having a polite disagreement with the auditors on the subject of accounting for contingencies. It appears that your firm is involved in four unrelated legal cases, P, Q, R and S. In case P the firm is suing for £10,000, in case Q the firm is suing for £20,000, in case R the firm is being sued for £30,000 and in case S the firm is being sued for £40,000. The firm has been advised by its lawyers that the chances of the firm winning each case is as stated.

Required: 

Write a memorandum to the managing director which:

(a) Explains why IAS 37 is relevant to these situations;

(b) States the required accounting treatment for each of the four cases in the accounts for the year;

(c) Gives journal entries for any necessary adjustments in the double-entry records;

(d) Suggests the contents of any notes to published accounts as required by IAS 37.

Transcribed Image Text:

Case PORS Q % of likely success 8 92 8 92