Advanced AccountingQuestion 5330 of 305
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6. What will be the treatment of legal cost and claim for legal action commenced by Mr. Ravi Kumar in the Books of Kay Ltd. as on 31 March, 2024 as per AS 29?

Options

ACreate a Provision for ` 5,45,000
BCreate a Provision for ` 5,00,000
CCreate a Provision for` 45,000 and make a disclosure of contingent liability of ` 5,00,000
DMake a disclosure of contingent liability of ` 5,45,000
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Correct Answer

Option CCreate a Provision for` 45,000 and make a disclosure of contingent liability of ` 5,00,000

All Options:

  • ACreate a Provision for ` 5,45,000
  • BCreate a Provision for ` 5,00,000
  • CCreate a Provision for` 45,000 and make a disclosure of contingent liability of ` 5,00,000
  • DMake a disclosure of contingent liability of ` 5,45,000

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Detailed Solution & Explanation

Under AS 29 (Provisions, Contingent Liabilities and Contingent Assets):
1. Legal cost of 45,000\displaystyle `\,45,000 is certain to be incurred irrespective of outcome, so a provision of 45,000\displaystyle `\,45,000 should be created.
2. The settlement claim of 5,00,000\displaystyle `\,5,00,000 is possible but not probable (not remote), so it is a contingent liability and should be disclosed in notes.
Hence, **Option C** is the correct answer.

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