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NEW QUESTION: 1
An entity is subject to warranty claims. A reliable estimate is that between US $1 million and US $3 million will probably be paid out. No estimate of loss within this range is more likely than any other. The entity should:
A. Disclose only a possible loss.
B. Make no journal entry at this time.
C. Defer a provision of US $1 million to US $3 million depending on the applicable national accounting standards.
D. Recognize a provision of US $1 million to US $3 million depending on the applicable national accounting standards.
Answer: D
Explanation:
A provision is a liability of uncertain timing or amount. Recognition of provisions is appropriate when the entity has a legal or constructive present obligation results from a past event called an obligating event), it is probable that an outflow of economic benefits will be necessary to settle the obligation, and its amount can be reliably estimated. Thus, a provision should be recognized. Moreover, the amount recognized should be the best estimate of the expenditure required to settle the obligation. However, the amount within the reliable estimate of the range of the obligation that will be recognized will vary from country to country.