YellowCard ASA manufactures accessories for iPods, iPhones, and iPads. It had the following selected transactions during calendar 2019. (For any part of this problem requiring an interest or discount rate, use 10%.)
1. YellowCard provides a 2-year warranty on its docking stations, which it began selling in 2019. YellowCard estimates that €45,000 will be spent in the future to service warranties related to 2019 sales. During 2019, YellowCard spent €6,000 servicing warranty claims.
2. YellowCard has a 1 year €200,000 loan outstanding from UBS. The loan is set to mature on February 28, 2020. For several years, UBS has agreed to extend the loan, as long as YellowCard makes all of its quarterly interest payments (interest is due on the last days of each February, May, August, and November) and maintains an acid-test ratio (also called quick ratio) of at least 1.25. On December 10, 2019, UBS provided YellowCard a commitment letter indicating that UBS will extend the loan another 12 months, provided that YellowCard makes the interest payment due on February 28.
3. During 2018, YellowCard constructed a small manufacturing facility specifically to manufacture one particular accessory. YellowCard paid the construction contractor €5,000,000 cash (which was the total contract price) and placed the facility into service on January 1, 2019. Because of technological change, YellowCard anticipates that the manufacturing facility will be useful for no more than 10 years. The local government where the facility is located required that, at the end of the 10-year period, YellowCard remediate the facility so that it can be used as a community center. YellowCard estimates the cost of remediation in the future to be €500,000.
Accounting
Prepare all 2019 journal entries relating to (a) YellowCard's warranties, (b) YellowCard's loan from UBS, and (c) the new manufacturing facility that YellowCard opened on January 1, 2019.
Analysis
Describe how the transactions above affect ratios that might be used to assess YellowCard's liquidity. How important is the commitment letter that YellowCard has from UBS to these ratios?
Principles
YellowCard is contemplating offering an extended warranty. If customers pay an additional €50 at the time of product purchase, YellowCard would extend the warranty an additional 2 years. Would the extended warranty meet the definition of a liability under IFRS? Briefly explain.