Highgrove plc is a manufacturing and distribution company. You are acting as auditor to Highgrove plc and you have been asked by the Board of Directors of the company to explain how the following items should be treated in the published accounts of the company for the year ended 31 December 1995.

In June 1995, Highgrove plc engaged a firm of building contractors to build an extension to the factory. In December 1995, just as the building was due to be completed, the structure collapsed and destroyed the canteen which was directly underneath.

The company is suing the builder for compensation. Highgrove plc is claiming

€150,000. The insurers of the building contractor have offered an out of court settlement of €80,000. Highgrove plc’s lawyer believes that the offer made by the building contractor is unreasonable and, when the case comes to court in March 1996, Highgrove plc stands a very good chance of winning the full €150,000. Fever »

Requirement Prepare a memorandum to the Board of Directors of Highgrove plc in which you state how the above should be reflected in the company’s published financial statements for the year ended 31 December 1995. (Assume all transactions are material, and ignore taxation.) -