Homework answers / question archive / 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

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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:

 

1. 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.

 

1. 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

 

1. 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.

 

1. 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.

 

1. 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.

 

1. 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.