Topic 6: Provisions: Ethics
ACCT2011: Financial Accounting A
BUSINESS SCHOOL
Self Study Questions
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1. H&P Problem 26.3, page 976
2. Following has been adapted from ¡°Financial Reporting¡± 3rd ed, Loftus et al. (2020), p. 286
Wizards Ltd manufactures tables. The financial controller has provided you with the following information in relation to sales of tables and its provision for warranty calculation for the year ended 30 June 2020:
Estimated costs of minor defect repairs for total sales in the year ended 30 June 2020
Estimated costs of major defect repairs for total sales in the year ended 30 June 2020
Expected % of total products sold during y/e 30/06/2020 having no defects in the year ended 30 June 2021
Expected % of total products sold during y/e 30/06/2020 having minor defects in the year ended 30 June 2021
Expected % of total products sold during y/e 30/06/2020 having major defects in the year ended 30 June 2021
Expected timing of settlement of warranty payments – those with minor defects
$1,000,000 $6,000,000
All before 30 June
Expected timing of settlement of warranty payments – those with major defects
40% between 1 July 2020 and 30 June 2021, 60% between 1 July 2021 and 30 June 2022
Discount rate
The opening balance
a) Calculate the provision for warranty balance at 30 June 2020.
b) Prepare all necessary journal entries for the year ended 30 June 2020. Include all workings.
Wizards Ltd considers the time of money will be material in all accounting periods. of provision for warranty in Wizards Ltd¡¯s financial statements at 1 July 2019 was nil.
Adapted from ¡°Financial Accounting¡± 9th ed, Deegan, C. (2020), Example 10.3 pp.382-383
On 1 July 2017 Quest Ltd relocated an item of plant to a factory site located in an area that is subject to strict local government environmental protection laws. Consequently, Quest Ltd has a legal obligation to return the area to its original condition when it closes the site, which is expected to be in 11 years¡¯ time.
At 1 July 2017 the best estimate to return the site to its original condition on 30 June 2028 is $750,000.
The pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the liability was 6% at 30 June 2018.
a) Calculate the provision for restoration costs balance at 1 July 2017.
b) Prepare all necessary journal entries for the year ended 30 June 2018. Include all workings.
Adapted from ¡°Financial Reporting¡± 3rd edition, Loftus et al. (2020), p. 283
You are a financial accountant working on the ¡¯s financial statements for the year ended 30 June 2022.
Identify whether each of the following would be a liability, provision, contingent liability or none of these, in the financial statements for the year ended 30 June 2022. Where appropriate, prepare all required journal entries. Assume the following amounts include any necessary discounting.
a) An amount of $42,000 owing to Petal Ltd for services rendered during May 2022.
b) Costs of $12,000 estimated to be incurred for relocating an employee from Kasey¡¯s Ltd¡¯s head office
location to another city. The staff member will physically relocate in July 2022.
c) Provision of $40,000 for the overhaul of a machine. The overhaul is needed every 5 years and the
machine was 5 years old at 30 June 2022.
d) Damages awarded against resulting from a court case decided on 26 June 2022. The judge
has announced that the amount of the damages will be set at a future date, expected to be in September 2022. has received advice from its lawyers that the amount of the damages could be anything between $50,000 and $7 million.
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