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What is important in these scenarios is to find answers to the following questions: Is there a present obligation as a result of a past
What is important in these scenarios is to find answers to the following questions:
Is there a present obligation as a result of a past obligating event?
Is a transfer of economic benefits probable during the settlement of the obligation?
Can a reliable estimate be made of the amount of the obligation?
If the answer to all questions is "yes", then a provision should be recognised in the
financial statements under IAS
a Plant overhaul costs
On January the company acquired new plant costing million. This plant
will require a complete overhaul after five years of use, at an estimated cost of
million. Accordingly, the company wishes to make a provision of for plant
overhaul costs in its financial statements for the year to December and then
to increase this provision by in each of the next four years. This will have the
effect of spreading the overhaul costs evenly over the years to
b An onerous contract?
On December the company moved from leased premises into new freehold
premises. The lease on the old premises will continue for three more years at an annual
cost of The lease cannot be cancelled and the premises cannot be sublet
or used for any other purpose. The company wishes to make a provision of
in its financial statements for the year to December
c Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under
the terms of the contract for sale the manufacturer undertakes to make good, by repair
or replacement, manufacturing defects that become apparent within three years from
the date of sale. On past experience, it is probable that there will be some claims under
the warranties.
d Warranties for a large population of items
A company sells goods with a sixmonth warranty. If minor defects were defected in all
of the goods covered by warranties at the end of the reporting period, the company
would incur costs of million. If major defects were detected in all of these goods, the
company would incur costs of million. Experience shows that of goods sold
have no defects, have minor defects and have major defects.
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