What is the correct accounting treatment for these two items in HJ’s financial statements?

HJ is currently in dispute with an employee, who is claiming $400,000 in a legal case against them.

HJ’s legal advisors have stated that it is probable that they will lose the case and will have to pay the amount claimed.

Also, HJ are claiming $250,000 from a supplier of defective goods and the legal advisors have stated that it is probable that HJ will be successfulin this claim.

What is the correct accounting treatment for these two items in HJ’s financial statements?
A . Provide for the $400,000 potential outflow and disclose the $250,000 potential inflow.
B . Provide for the $400,000 potential outflow and recognise the $250,000 potential inflow.
C . Disclose the $400,000 potential outflow and disclose the $250,000 potential inflow.
D . Disclose the $400,000 potential outflow and recognise the $250,000 potential inflow.

View Answer

Answer: A