Comprehensive problem    LO2, 3, 5, 6, 7, 8 ChubbyChocs Ltd, a listed company, is a manufacturer of confectionery and biscuits. The end of its reporting period is 30 June. Relevant extracts from its financial statements at 30 June 2020 are shown. The provision for warranties at 30 June 2020 was calculated using the following assumptions (there was no balance carried forward from the prior year). Estimated cost of repairs — products with minor defects $1 000 000 Estimated cost of repairs — products with major defects $6 000 000 Expected % of products sold during FY 2020 having no defects in FY 2021 80% Expected % of products sold during FY 2020 having minor defects in FY 2021 15% Expected % of products sold during FY 2020 having major defects in FY 2021 5% Expected timing of settlement of warranty payments — those with minor defects All in FY 2021 Expected timing of settlement of warranty payments — those with major defects 40% in FY 2021, 60% in FY 2022 Discount rate 6%. The effect of discounting for FY 2021 is considered to be immaterial. During the year ended 30 June 2021, the following occurred.

(a) In relation to the warranty provision of $430 200 at 30 June 2020, $200 000 was paid out of the provision. Of the amount paid, $150 000 was for products with minor defects and $50 000 was for products with major defects, all of which related to amounts that had been expected to be paid in the 2021 financial year.

(b) In calculating its warranty provision for 30 June 2021, ChubbyChocs 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 $5 000 000 Expected % of products sold during FY 2021 having no defects in FY 2022 85% Expected % of products sold during FY 2021 having minor defects in FY 2022 12% Expected % of products sold during FY 2021 having major defects in FY 2022 3% Expected timing of settlement of warranty payments — those with minor defects All in FY 2022 Expected timing of settlement of warranty payments — those with major defects 20% in FY 2022, 80% in FY 2023 Discount rate No change. The effect of discounting for FY 2021 is considered to be immaterial.

(c) ChubbyChocs determined that part of its plant and equipment needed an overhaul — the conveyor belt on one of its machines would need to be replaced in about May 2022 at an estimated cost of $250 000. The carrying amount of the conveyor belt at 30 June 2020 was $140 000. Its original cost was $200 000.

(d) ChubbyChocs was unsuccessful in its defence of the peanut allergy case and was ordered to pay $1 500 000 to the plaintiffs. As at 30 June 2021, ChubbyChocs had paid $800 000.

(e) ChubbyChocs commenced litigation against one of its advisers for negligent advice given on the original installation of the conveyor belt referred to in

(c) above. In April 2021 the court found in favour of ChubbyChocs. The hearing for damages had not been scheduled as at the date the financial statements for 2021 were authorised for issue. ChubbyChocs estimated that it would receive about $425 000.

(f) ChubbyChocs signed an agreement with BankSweet to the effect that ChubbyChocs would guarantee a loan made by BankSweet to ChubbyChocs’ subsidiary, CCC Ltd. CCC’s loan with BankSweet was $3 200 000 as at 30 June 2021. CCC was in a strong financial position at 30 June 2021. Required Prepare the relevant extracts from the financial statements (including the notes) of ChubbyChocs Ltd as at 30 June 2021, in compliance with AASB 137/IAS 37 and related accounting standards. Include comparative figures where required. Show all workings separately. Perform your workings in the following order. 1. Calculate the warranty provision as at 30 June 2020. This should agree with the financial statements provided in the question. 2. Calculate the warranty provision as at 30 June 2021. 3. Calculate the movement in the warranty provision for the year. 4. Calculate the prospective change in depreciation required as a result of the shortened useful life of the conveyor belt. 5. Determine whether the unpaid amount owing as a result of the peanut allergy case is a liability or a provision. 6. Determine whether the receipt of damages for the negligent advice meets the definition of an asset or a contingent asset. 7. Determine whether the bank guarantee meets the definition of a provision or a contingent liability (ignore AASB 139/IAS 39 in this regard). 8. Prepare the financial statement disclosures.