Question

Applying the definition and recognition criteria for liabilities, explain how the following items would be recognised /disclosed. Give reasons for your answers. (a) Product warranties Pop-up Ltd manufactures toasters. They sell the toasters with a warranty which states that Pop-up Ltd will fix any defects that appear within 3 years of the date of purchase. (b) Mortgage loan on land (15 year) Brown Ltd has borrowed $10,000 from a Bank to purchase some land. The loan is for 15 years and is secured by a mortgage over the land. (c) Damages in law case (case not yet decided) Orange Ltd is being sued for damages by a customer who was injured when using one of the company’s products. Legal advice suggests that there is a 65% probability that the company will be found liable as the product was faulty. If found liable damages are estimated at between $18,000 and $22,000. The case will be decided in court at a later date. Would your answer change if the probability was 35%? (d) Damages in law case (case decided but amount not yet determined) An oil tanker operated by Green Ltd ran aground and spilled oil, destroying valuable fishing grounds. Green was sued for damages and found liable. The amount of the damages cannot been determined. (e) Costs of replacement of components in machine Pink Ltd had noted that one of the critical machines in its factory was regularly causing electrical faults. An inspection has now revealed that some of the electrical components in this machine must be replaced. If not replaced within 2 months the machine would not be able to be operated at all. The factory cannot operate without this machine. The company is currently attempting to source the required components and the cost of replacing the components is estimated at $70,000. WQ2. The following information is provided about Albert Ltd: Albert Ltd provides a 12 month warranty on a range of its products. The majority of warranty claims occur within 2 months of the sale of the product.  The expense for warranties for the year ending 30 June 2020 was $780,000.  The balance of the provision for warranties at 30 June 2020 was $49,000.  The balance of the provision for warranties at 30 June 2019 was $61,000. Required: Prepare the note disclosures required for this provision for the year ending 30 June 2020.

Answer 1