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Legal claim

On 5 April 2021, a claim of R250 000 was instituted by Nacto Limited against Taco Limited. The lawsuit was on the grounds of infringement of a trademark.

On 30 June 2021, the financial year-end, Nacto Limited's legal advisors believed that the claim would probably succeed, but they are not virtually certain about its outcome.

Capital expenditure

Nacto Limited is planning capital expenditures to be incurred during the 2022 financial year. The capital expenditure is in relation to the expansion of their manufacturing plant.

The directors approved the total cost of R5 000 000 for the project.

On 5 May 2021, the contract for the construction work on the manufacturing plant was agreed upon and signed. The total cost of construction being R3 100 000. Construction is due to start on 5 July 2021.

On 30 June 2021, the costs to manufacture and install the required machinery have been approved at a total cost of R1 900 000. The parties are still finalising the contract documents for signature; therefore, no contract has been signed with the supplier at year-end.

4.1) Regarding the legal claim, discuss whether a contingent asset should be recognised in the financial statements of Nacto Limited for the year ended 30 June 2021. (7 marks)

4.2) In respect of all the information given in the question, prepare the disclosure required in the financial statements of Nacto Limited for the year ended 30 June 2021 to comply with the requirements of International Financial Reporting Standards.

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