Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Relevant extracts from Magic Corporation's financial statements at 31 December 2019 are as follows: Current liabilities Provision for warranties P405,000 Non-current liabilities Provision for warranties 270,000 Note 10 - Contingent liabilities Magic is engaged in litigation with various parties in relation to allergic reactions to traces of peanuts alleged to have been found in packets of fruit gums
Relevant extracts from Magic Corporation's financial statements at 31 December 2019 are as follows:
|
Current liabilities |
|
|
|
Provision for warranties |
|
P405,000 |
|
|
|
|
|
Non-current liabilities |
|
|
|
Provision for warranties |
|
270,000 |
Note 10 - Contingent liabilities
Magic is engaged in litigation with various parties in relation to allergic reactions to traces of peanuts alleged to have been found in packets of fruit gums. Magic strenuously denies the allegations and, as at the date of authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any costs or damages that may be payable to the plaintiffs.
The provision for warranties at 31 December 2019 was calculated using the following assumptions: There was no balance carried forward from the prior year.
|
Estimated costs of repairs - products with minor defects |
P1,500,000 |
|
Estimated cost of repairs - products with major defects |
P9,000,000 |
|
Expected % of products sold during 2019 having no defects in 2020 |
80% |
|
Expected % of products sold during 2019 having minor defects in 2020 |
15% |
|
Expected % of products sold during 2019 having major defects in 2020 |
5% |
|
Expected timing of settlement of warranty payments - those with minor defects |
All in 2020 |
|
Expected timing of settlement of warranty payments - those with major defects |
40% in 2020, 60% in 2021 |
During the year ended 31 December 2020 the following occurred:
- In relation to the warranty provision of P675,000 at 31 December 2019, P300,000 was paid out of the provision. Of the amount paid, P225,000 was for products with minor defects and P75,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2020.
- In calculating its warranty provision for 31 December 2020, Magic made the following adjustments to the assumptions used for the prior year:
|
Estimated cost of repairs - products with minor defects |
No change |
|
Estimated cost of repairs - products with major defects |
P7,500,000 |
|
Expected % of products sold during 2020 having no defects in 2021 |
85% |
|
Expected % of products sold during 2020 having minor defects in 2021 |
13% |
|
Expected % of products sold during 2020 having major defects in 2021 |
2% |
|
Expected timing of settlement of warranty payments - those with minor defects |
All in 2021 |
|
Expected timing of settlement of warranty payments - those with major defects |
20% in 2021, 80% in 2022 |
- Magic determined that part of its plant and equipment needed an overhaul - the conveyer belt on one of its machines would need to be replaced in about December 2021 at an estimated cost of P500,000. The carrying amount of the conveyer belt at 31 December 2020 was P280,000. Its original cost was P400,000.
- Magic was unsuccessful in its defense of the peanut allergy case and was ordered to pay P2,000,000 to the plaintiffs. As at 31 December 2020 Magic had paid P1,500,000.
- Magic commenced litigation against one of its advisers for negligent advice given on the original installation of the conveyers' belt referred to in (4) above. In October 2020 the court found in favor of Magic. The hearing for damages had not been scheduled as at the date the financial statements for 2020 were authorized for issue. Magic estimated that it would receive about P500,000.
- Magic signed an agreement with Choko Bank to the effect that Magic would guarantee a loan made by Choko Bank to Magic's subsidiary, UN Ltd. UN's Ltd. loan with Choko Bank was P3,000,000 as at 31 December 2020. UN Ltd. was in a strong financial position at 31 December 2020.
Based on the above and the result of your audit, answer the following:
The warranty expense in 2020.
The provision for warranties as of December 31, 2020.
The provision for warranties to be reported as current liability as of December 31, 2020.
The provision for warranties to be reported as non-current liability as of December 31, 2020.
Expert Solution
1) Warranty Expense, 2020- P345,000
2) Total Estimated warranty liability as of December 31,2020- P720,000
3) Current portion of estimated warranty liability, 2020- P600,000
4) Non-current portion of estimated warranty liability, 2020- P120,000
Step-by-step explanation
| Particulars | Computation | Amount (Php) | Current or Non-current |
| Estimated liability- Minor repairs | P1,500,000 x 13% | 195,000 | Current |
| Estimated Liability-Major repairs | P7,500,000 x 2% x 20% | 30,000 | Current |
| Estimated Liability-Major repairs | P7,500,000 x 2% x 80% | 120,000 | Non-current |
| Warranty Expense, 2020 | P345,000 | ||
| Total Estimated warranty liability from previous year | P675,000 |
| Less: Actual warranty serviced in 2020 | P300,000 |
| Balance, (current) | P375,000 |
| Estimated warranty liability-Current (P195,000+ P30,000+ P375,000) | P600,000 |
| Estimated warranty liability-Noncurrent | P120,000 |
| Total Estimated warranty liability, 2020 | P720,000 |
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
