Question $4(25$ marks$)$

Yesta Limited manufactures electronic automobiles and sells to its Asian customers. The company

provides warranties associated with the automobile sold. It is the company's policy to provide two

years' warranty for repairs and replacement, including parts and labour for the products which it

sells. In preparing the financial statements for the year ended $31$ December $2023,$ the company

estimates that:

$80\%$ of automobiles sold in a year have zero defects;

$15\%$ of automobiles sold in a year have minor defects;

$5\%$ of machines sold in a year have major defects.

The costs of repairing "minor defects" and "major defects" for automobiles sold in a year are

$$90,000$ and $$250,000$ respectively.

During the year, a customer who previously purchased $2$ electronic automobiles from Yesta

Limited sued the company for injuries caused by malfunctions of the automobiles. The

representing lawyer team believes that:

$70\%$ chance for contributory negligence and damages against the company for $$6$ million;

$30\%$ chance for fully responsible and damages against the company for $$10$ million.

In addition, legal costs were estimated at $$1,500,000.$

Required:

Discuss whether Yesta Limited requires the recognition of a provision in the financial

statements as at its end of the reporting period of $31$ December $2023$ in accordance with

HKAS $37$ Provisions, Contingent Liabilities and Contingent Assets.

$($Total $25$ marks$)$