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NEW QUESTION: 1
Roadrunner is a large motor-race track construction company. The finance director is working on the published accounts for the year ended 31 March 2013. The following cases have to be resolved before the accounts can befinalized.
(i)One of Roadrunner's customers using the tracks was injured during a race. The customer claims that the accident was Roadrunner's fault due to there being a cleft on track. Roadrunner's lawyers have advised that the customer has a very strong case, but will be unable to estimate the financial outcome until further medical evidence becomes available.
(ii)Roadrunner has recently expanded its overseas market building motor racing tracks in areas with no such activity. It is expected that the tracks will be abandoned in five years' time. At that point the tracks will need to be dismantled and the area restored to its original condition in accordance with current legislation. The estimated cost of restoration is expected to be $4 million. The cost of capital of the company is 10%.
Which of the following options is correct in relation to the above two facts in respect of Roadrunner?
A. (i) A provision should be made;
(ii)
Should be treated as contingent liability
B. (i) A liability for the future costs should berecognizedimmediately;
(ii)
Should be treated as a contingent liability and disclosed in note to the financial statements
C. (i) Should be treated as a contingent liability and disclosed in a note to the financial statements;
(ii)
A liability for the future costs should berecognizedimmediately
D. (i) A liability for the future costs should berecognizedimmediately;
(ii)
Should be treated as contingent liability
Answer: C

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