Economics

Industrial Limited manufactures high quality industrial tools. During the preparation of its 31 March 2021 financial statements, the directors identified a number of issues that they require your assistance with. The directors wish to issue the financial statements on 15 June 2021.

1. Industrial Limited warrants its industrial tools against defects in material and workmanship for a period of one year. Based on their previous experience, warranty costs are expected to approximate 2 percent of sales. At 31 March 2020, the provision for warranty liability in the statement of financial position amounted to $708,000. Sales of industrial tools for the reporting period ended 31 March 2021 amounted $44,956,800. Actual warranty expenses incurred during the reporting period ended 31 March 2021 amounted to $708,000.

2. During the reporting period ended 31 March 2021, the government initiated a comprehensive review of the Accident Compensation Scheme. This review means that Industrial will have to retrain its staff in order to comply with the more comprehensive requirements. The cost of retraining staff is expected to amount to $449,000.

3. Industrial Limited has been involved in a dispute with a competitor for a breach of patent. On 29 April 2021, judgement was entered against Industrial Limited in an amount of $8,900,400 plus interest of $435,800. Industrial Limited plans to appeal the judgement but its attorneys are unable to provide an indication of the eventual outcome. Should Industrial Limited lose the appeal, the result is unlikely to impact on the future operations of the firm.

4. During the reporting period ended 31 March 2021 the New Zealand government introduced legislation requiring all machinery utilised by manufacturing operations to undergo a comprehensive overhaul once every five years in addition to routine maintenance. The directors of Industrial Limited estimate that the cost of this overhaul will amount to $2,440,000 and they propose to make an annual provision of $488,000 for this future expense.

5. In January 2021, Industrial Limited decided to guarantee the bank overdraft of Toys Limited. At the time of providing the guarantee, Toys Limited was in a stable financial position.

Required: Determine and explain the most appropriate accounting treatment for each situation. Provide the adjusting journal entry when necessary, if no journal entry is required, state this.