A company sell vehicles for Ksh 6 million each and provides 3 years' warranty on the engine of the car which cost is around sh 800,000. The company has sold 5400 units; the company has to estimate how many cars may come for engine replacement during the warranty period at 12%. However, there are claim that may be lodged for general damages for accidents suffered due to the engine failure. The general damages are reasonably possible and estimated at Ksh 300 million. Out of the general damages, Ksh 100 may be recovered from the association of motor vehicle insurers. Additionally, the company vehicle emission exceeds the global threshold of 0.2 kg per liter of fuel, if the government pass legislation on capping carbon emissions, the company might (remotely) be liable for about 2% of total sales.

Required:

a) Using the above case explain the differences between provision, contingent liabilities and contingent assets.

b) Compute the provision necessary and pass the necessary journal entries.

c) Make the relevant disclosures for contingent liabilities.

d) Discuss all the issues where no disclosures or provision is made

Answer rating: 100% (QA)

a Provision contingent liabilities and contingent assets differ in the level of possibility ... View the full answer