Problem -
You are provided with the information below on Busy Body Marine Pty Ltd (BBM), an entity that makes, distributes and repairs marine engines. The end of the reporting period is June 30.
Extracts from the Statement of Financial Position dated 30 June 2014
Current Liabilities
Provision for Warranties $540,000
Non-Current Liabilities
Provision for Warranties $320,399
Non-Current Assets
Plant & Equipment - At Cost $8,000,000
Accumulated Depreciation $2,400,000
Carrying Amount $5,600,000
Plant & Equipment has a useful life of 10 years and is depreciated on a straight line basis
Note 36 to the Statement
Busy Body Marine Pty Ltd is engaged in litigation with various fishing fleets who believe their engines have not been properly serviced. This includes the allegations that the wrong synthetic motor oil was used by Busy Body Marine during servicing. Busy Body Marine denies the allegations as it made all necessary enquiries with the national distributor of the equipment before using the motor oil. As of the day of authorizing the financial statements for issue, Busy Body Marine 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 30 June 2014 was calculated using the following assumptions (and there was no balance carried forward from the prior year)
During the year ended 30 June 2015, the following occurred:
1. In relation to the warranty provision at 30 June 2014, $400,000 was paid out of the provision. Of the amount paid, $300,000 was for products with minor defects and $100,000 was for products with major defects, all of which related to amounts that had been expected to be paid in the 2015 financial year.
2. In calculating its warranty provision for 30 June 2015, BBM made the following adjustments to the assumptions used for the prior year
Estimated cost of repairs - products with minor defects - $ 2,000,000
Estimated cost of repairs - products with major defects - $ 12,000,000
Expected % of products sold during FY14 having NO defects in FY15 - 80%
Expected % of products sold during FY14 having MINOR defects in FY15 - 15%
Expected % of products sold during FY14 having MAJOR defects in FY15 - 5%
Expected timing of settlement of warranty payments - those with MINOR defects - All in FY15
Expected timing of settlement of warranty payments - those with MAJOR defects - 40% in FY15; 60% in FY16
Discount rate - 6% p.a. but the effect of discouting for FY15 is considered immaterial
Estimated cost of repairs - products with MINOR defects - No change
Estimated cost of repairs - products with MAJOR defects - 10,000,000$
Expected % of products sold during FY14 having NO defects in FY15 85% Expected % of products sold during FY14 having MINOR defects in FY15 12% Expected % of products sold during FY14 having MAJOR defects in FY15 3% Expected timing of settlement of warranty payments - those with MINOR defects All in FY16 Expected timing of settlement of warranty payments - those with MAJOR defects 20% in FY16; 80% in FY17
Discount rate - No change. The effect of discouting for FY16 is considered immaterial
1. BBM determined that part of its plant & machinery needed an overhaul - a piece of plant would need to be replaced in about June 2016 at an estimated cost of $500,000. The carrying amount of this piece of plant at 30 June 2014 was $280,000. Its original cost was $400,000.
2. BBM was unsuccessful in its defense of the maintenance/motor oil case and was ordered to pay $1,500,000 to the plaintiffs. As at 30 June 2015 BBM had paid $800,000
3. BBM commenced litigation against one of its advisers for negligent advice given on the original installation of the piece of plant referred to in 3 above. In April 2015 the court found in favor of BBM. The hearing for damages had not been scheduled as at the date the financial statements for 2015 were authorized for issue. BBM estimated it would receive about $425,000.
4. BBM signed an agreement with Bent Bank to the effect that BBM would guarantee a loan made by Bent Bank to BBM's subsidiary Little BBM Pty Ltd. Little BBMs loan with Bent Bank was $3,200,000 as at 30 June 2015 and Little BBM was in a strong financial position at that date.
Instructions
Answer the questions below regarding Busy Body Marine Pty Ltd (BBM) remembering the company has to comply with AASB 137 and other accounting standards.
(a) The balance of the warranty provision as at 30 June 2014 is given above. Establish how it was calculated and show your workings.
(b) Find the balance of the warranty provision as at 30 June 2015. Show all your workings.
(c) Calculate the prospective change in depreciation required as a result of the shortened useful life of the piece of plant. Show all your workings.
(d) Determine whether the unpaid amount owing as a result of the maintenance/motor oil case is a liability or a provision and give your reasons.
(e) Determine whether the receipt of damages for the negligent advice meets the definition of an asset or a contingent asset and give your reasons.
(f) Determine whether the bank guarantee meets the definition of a provision or a contingent liability and give your reasons. (Ignore AASB 139 in this regard.)
Attachment:- Assignment File.rar