QUESTION 4 (25 MARKS)

A newly appointed Accounts Executive of Comel Bhd known as Merlina is facing a hard time to differentiate between the conditions of "provision" and "contingent liability". She faced two hard situations that would affect the way she would finalise the company's financial statements, prior to her Finance Director's review. The financial year end of the company is on 31 December each year. Merlina is unsure about the accounting treatments of the following situations:

i). During the year 2021, one of Comel Bhd's employees was injured while working. The

employee took legal action and sought damages of RM200,000. Comel Bhd has taken

legal advice and is confident that the entity will be held liable but the amount payable is

questionable. (5 marks)

ii). Sometime in November 2021, a legal representative from one of its creditors, Mawar Bhd

issued a legal letter. The content of the letter indicates that Mawar Bhd has filed a lawsuit

against Comel Bhd for its failure to repay the bills of services that have been rendered to

Comel Bhd last year. Total amounts involved would be amounting to RM750,000. Comel

Bhd has then consulted with the company's legal adviser, who is on the opinion that Comel

Bhd could probably lose this case in court. (4 marks)

iii). Comel Bhd has been practising a policy of allowing its customers to return faulty goods

within six months from the date of sales, even though the company has no legal obligation

to do so. Based on the past experience, it was probable that there would be such returns.

Comel Bhd estimates that such return usually amounts to RM3,000 annually. (5 marks)

iv). On August 2020, Comel Bhd sued one of its suppliers for failure to provide materials as

specified in the contract. Based on the advice of Comel lawyers, it was virtually certain

that the company would win the case and expected to be awarded for compensation. As at

June 2021, the court ordered the supplier to pay RM250,000. As at the year end, Comel Bhd did not receive the money yet. (5 marks)

Required:

a) Explain briefly to Merlina the recognition criteria to recognise a provision as a liability. (4 marks) (CLO2:PLO2:C3)

b) For the year ended 31 December 2021, discuss the accounting treatment of the above situations in accordance to MFRS137 Provisions, Contingent Liabilities and Contingent Assets. (Marks as allocated: Total 19) (CLO2:PLO2:C5)

C) Prepare the journal entry for situation (2). (2 marks) (CLO2:PLO2:C5)