For each of the situations below, outline the accounting treatment you would recommend and give the reasoning principles involved.
a) At the year end there was a debit balance in the books of a company for Sh.150,000 representing an estimate of the amount receivable from an insurance company for an accident claim. In May 2011 before the directors had agreed on the final draft of the published accounts, the amount of the claim was finally settled as Sh. 186,000. (3 marks)
b) A company has an item of equipment which cost Sh.4,000,000 in 2009 and was expected to last for ten years. At the beginning of the year ended 30 April 2011 the book value was Sh.2,800,000. It is now thought that the company will soon cease to make the product for which the equipment was specifically purchased. Its recoverable amount is only Sh.800,000 at 30 April 2011. (3 marks)
c) On 31 March 2011, a company entered into legal action defending a claim for supplying faulty machinery. The company's lawyers advise that there is a 20% probability that the claim will succeed. The amount of the claim is Sh.5,000,000. (3 marks)
d) An item has been produced at a manufacturing cost of Sh.18,000 against a customer's order at an agreed price of Sh.23,000. The item was in stock at the year end awaiting delivery against instructions. In May 2011, the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately Sh.3,000 which is expected to make it marketable with other customers at a price of about
Sh.19,000.
(3 marks)
e) At 30 April, the company has a total potential liability of Sh.10,004,000 for warranty work on contracts. Past experience shows that 10% of these costs are likely to be incurred, 30% may be incurred but that the remaining 60% is highly unlikely to be incurred. (3 marks)