Financial Reporting - Provisions

It's a liability because it's Cr so I assume it means they predict they will need to pay £75k to customers for warranty claims. So I guess it would go as a current liability in the balance sheet.

It says warranty costs are charged to admin costs which will be in the P&L, but if you do that you are basically writing off £75,000 as warranty claims when it's only a provision. (Whereas balance sheet items are carried each year, so it can be adjusted as necessary each year)

Reply 2

OP

Original post by Runninground

It's a liability because it's Cr so I assume it means they predict they will need to pay £75k to customers for warranty claims. So I guess it would go as a current liability in the balance sheet.

It says warranty costs are charged to admin costs which will be in the P&L, but if you do that you are basically writing off £75,000 as warranty claims when it's only a provision. (Whereas balance sheet items are carried each year, so it can be adjusted as necessary each year)

I did think that it would be on balance sheet only. Thanks

Reply 3

But thinking about it your double entry will need a Dr so I can only assume it's already been Dr to the P&L (do you have the TB? What is the admin costs figure?)

Reply 4

OP

Original post by Runninground

But thinking about it your double entry will need a Dr so I can only assume it's already been Dr to the P&L (do you have the TB? What is the admin costs figure?)

This is the actual question:

Studentactivity 1

The followinginformation has been extracted from the books of Good Start plc for the year to31 March 2013

Dr Cr

£000 £000
Administrativeexpenses 170
Interest paid 5
Called up sharecapital (ordinary shares of £1 each) 200
Dividends 6
Cash at bank and inhand 9
Tax (remaining balancefrom previous year) 10
Warrantyprovision 90
Distributioncosts 240
Land and buildings:
at cost 210
Accumulateddepreciation (at 1 April 2012) 48
Plant and machinery:
at cost 125
Accumulateddepreciation (at 1 April 2012) 75
Retained earnings (atApril 2012) 270
Loan 80
Purchases 470
Sales 1,300
Inventory (at 1 April2012) 150
Trade payables 60
Trade receivables 728 0
2,123 2,123

Additional Information:

1.

2.

Inventory at 31 March 2013 was valued at £250,000

3.

Building, plant and machine are depreciated on a straight-line basis (assuming no residual value) at the following rates:

On cost: Building 5%
Plant andmachinery 20%

1.

2.

Land at cost was £110,000. Land is not depreciated.

3.

There were no purchases or sales of non-current assets during the year to 31 March 2013.

1.

2.

The depreciation charges for the year to 31 March 2013 are to be apportioned as follows:

Cost of sales 60%
Distribution costs 20%
Administrative expenses 20%

6. The tax is for the year to 31 March 2013 (ata rate of 30%) are estimated to be
135,000

1.

2.

The directors paid a dividend of 3p per share. The loan is repayable in five years

1.

2.

The year end provision for warranty claims has been estimated at £75,000. Warranty costs are charged to administrative expenses.

Required:

Prepare Good Start plc’s income statement for the yearto 31 March 2013 and a statement of financial position as at that date withoutaccompanying notes.

Its not lined up correctly on here but you will get the jist!

Reply 5

Oh I get it now.

It's much like doubtful debts.

There is already a warranty provision of £90,000 in the TB (didn't see that earlier) so you simply need to decrease this to £75,000 via the administrative expenses.

So it would be £15,000 Dr Warranty Provision, Cr Admin Exp

Admin Exp would be shown on the P&L as normal and Warranty Prov would be shown on the balance sheet. (Probably as a current liab)

Reply 6

OP

Original post by Runninground

Oh I get it now.

It's much like doubtful debts.

There is already a warranty provision of £90,000 in the TB (didn't see that earlier) so you simply need to decrease this to £75,000 via the administrative expenses.

So it would be £15,000 Dr Warranty Provision, Cr Admin Exp

Admin Exp would be shown on the P&L as normal and Warranty Prov would be shown on the balance sheet. (Probably as a current liab)

Cheers for that, i'll give that a go!

With regards to the tax, it says balance from last year is 10k, I presume this has not been paid and should be added to the estimated 135k to be put on balance sheet under current liabilities total of £145k. Would you agree

Reply 7

OP

Original post by mizzjulie

Cheers for that, i'll give that a go!

With regards to the tax, it says balance from last year is 10k, I presume this has not been paid and should be added to the estimated 135k to be put on balance sheet under current liabilities total of £145k. Would you agree

Just put figures in for provision and was 10k out but I hadnt dealt with the tax.

Therefore, I put the 10k in tax paid on income statement and thestatement of financial position now balances. However, I have not dealt withthe £135k tax, the note states:

6. The tax is for the year to 31March 2013 (at a rate of 30%) are estimated to be
135,000

From what I can see it covers all the areas for a provision as it isfrom a past event and it will most likely lead to an outflow of cash. But if Iput this provision in, then my balance sheet does not balance!!! Any ideas?

(edited 10 years ago)

Reply 8