UNIVERSITY OF JOHANNESBURG

COLLEGE FOR BUSINESS AND ECONOMICS

DEPARTMENT OF COMMERCIAL ACCOUNTING

FAC22B2

Unit 4 Provisions and Contingencies

Tutorial Question Week 1

Learning objectives

1. Know and understand the difference between liability and provision

2. Know and understand the difference between legal obligation and constructive obligation

3. Know the different methods of determining the ‘best estimate’ amount.

3. Be able to recognise a provision and changes in provision balance.

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Question 1 (27 marks)

Mani High is a private school and has a 31 December year-end.

On 5 April 2020 Mani High was sued for R800 000 in damages by the parent of a child whose arm
was cut by a broken glass at school. Mani High instructed their lawyers to oppose the claim in
court because they believed that the parent’s claim of R800 000 for medical expenses is
excessive.

On 30 June 2020, the lawyers of Mani High indicated that they believed that the courts would find
Mani High guilty of negligence and that the school would probably have to pay compensation
amounting to R300 000. The amount of R300 000 is based on previous experience with similar
incidents.

The case was heard on 10 January 2021 and the court ruled that Mani High had to pay
compensation amounting to R250 000. Mani High paid the amount on 20 January 2021.

REQUIRED
1. What is the difference between a liability and a provision? (4)

2. Different methods can be used to calculate the best estimate of an obligation. List all the
methods as suggested by IAS 37 and indicate which of the listed methods applies in the
above scenario. (3)

3. Assuming the above scenario gives rise to a present obligation, identify the type of present
obligation in the scenario? Give a reason to support your answer. (3)

4. Discuss how the above matter should be accounted for in Mani High’s financial statements
on 31 December 2020. (10)

5. Provide the relevant journal entries to account for the information in 2020 and 2021 financial
years. (7)

NB: Journal narrations must be provided.

IGNORE VAT

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