Question 2 A. i. ii. What is the amount of the provision that should be provided...

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Question 2 A. i. ii. What is the amount of the provision that should be provided for by the company in accordance with IAS 37 based on the scenarios below? Somerset Deliveries Plc is an outsourcing company that does deliveries for Several other companies. The company is being sued by a customer for $ 500 000 for breach of contract over a cancelled order. The company has obtained legal opinion that there was a 20% chance that the company will lose the case. Accordingly, the company has made a provision of $100 000 ($500 000 20%) in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $50 000. These costs have not been provided for as the case will not go to court until the following year. (4 marks) Micro Processors Ltd, supplies microchips to manufacturers of electrical appliances, guarantees them for 12 months from the date of purchase. If a serious fault occurs during that period, the microchips are replaced free of charge. The company has estimated that if all the microchips sold in the last 12 months required repairs the cost would be $1 million. If all these microchips had more serious faults and had to be replaced the cost would be three $3 million. The normal pattern is that 80% of the Chips sold will be fault free, 15% will require repairs and 10% will be replaced (4 marks) Question 2 A. i. ii. What is the amount of the provision that should be provided for by the company in accordance with IAS 37 based on the scenarios below? Somerset Deliveries Plc is an outsourcing company that does deliveries for Several other companies. The company is being sued by a customer for $ 500 000 for breach of contract over a cancelled order. The company has obtained legal opinion that there was a 20% chance that the company will lose the case. Accordingly, the company has made a provision of $100 000 ($500 000 20%) in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $50 000. These costs have not been provided for as the case will not go to court until the following year. (4 marks) Micro Processors Ltd, supplies microchips to manufacturers of electrical appliances, guarantees them for 12 months from the date of purchase. If a serious fault occurs during that period, the microchips are replaced free of charge. The company has estimated that if all the microchips sold in the last 12 months required repairs the cost would be $1 million. If all these microchips had more serious faults and had to be replaced the cost would be three $3 million. The normal pattern is that 80% of the Chips sold will be fault free, 15% will require repairs and 10% will be replaced (4 marks)