The draft financial statements of Pedro, a limited liability company, for the year ended 31 December 2019 are currently under review. The following points have been raised:

• An ex-employee has started an action against Pedro for wrongful dismissal. The companys legal team have stated that the ex-employee is likely to succeed. The following estimates have been given by the lawyers relating to the case:

a) Legal costs (to be incurred whether the claim is successful or not) $10,000

b) Settlement of claim if successful $30,000

Currently no provision has been made by Pedro in the financial statements.

• Pedro has a policy of refunding the cost of any goods returned by dissatisfied customers, even though it is under no legal obligation to do so. This policy of making refunds is generally known. At the year end, Pedro reliably estimated that returns totalling $5,200 will be made after the year-end.

• A customer has made a claim against Pedro for injury suffered following the purchase and use of a defective product. According to legal advisers it is not likely that Pedro will have to pay financial compensation of $150,000 to the customer. In turn, Pedro has made a counter-claim against the supplier of the defective product for $120,000 and believes it is probable that its claim against the supplier will be successful.

State with reasons what adjustments, if any, should be made by Pedro`s in the financial statements