You are preparing a company's accounts to 31 Decethber 1984 and are given the following information after you have prepared the draft accounts:

(i) A customer is suing you for damages; your solicitor estimates the potential liability between £50,000 and £80,000.

(ii) A car model has become obsolete and it is estimated that 100 cars

(costing £200,000) in stock will be sold for between £100,000 and

£130,000.

(a) How will the foregoing affect the 1984 profit?

(b) If the claim is settled in 1985 for £65,000 and the cars sold for

£115,000, what will be the effect on the 1985 profit?

(c) What are your conclusions from the foregoing?