IX – AUDIT OF LIABILITIES

Provisions, contingent liabilities, and contingent assets

Burdeos Corporation, a listed company, is a manufacturer of confectionery and biscuits. Its end of
reporting period is December 31. Relevant extracts from its financial statements at 31 December
2019 are as follows:
Current liabilities:
Provision:
Provision for warranties $270,000

Non-current liabilities:
Porvision:
Provision for warranties 180,000
Burdeos is engaged in litigation with various parties in relation to allergic reactions to traces of
peanuts alleged to have been found in packets of fruit gums. Burdeos strenuosly denies the
allegations and, as at the date of authorizing the financial statements for issues, 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 December 31, 2019 was calculated using the following
assumptions: There was no balance carried forward from thye prior year:
Estimated cots of reparis – products with minor defects $1,000,000
Estimated cost of repairs – products with major defects $6,000,000
Expected % of products sold during 2009 having no defects in 2020 80%
Expected % of products sold during 2009 having minor defects in 2020 15%
Expected % of products sold during 2009 having major defects in 2020 5%
Expected timing of settlement of warranty payments
– those with minor defect All in 2020 40% in 2020,
Expected timing of settlement of warranty payments those with
major defects 60% in 2021

During the year ended December 31, 2020 following accured:

1. In relation to the warranty provision of $450,000 at December 31, 2009, $200,000 was
paid out of the provision. Of the amount paid, $150,000 was for products with minor defects
and $50,000 was for products with major defects, all of which related to amounts that had
been to be paid in 2020.

2. In calculating its warranty provision for December 31, 2020, Burdeos made the following
adjustments to the assumptions used for the prior year:
Estimated cost of repairs – products with minor defects No change
Estimated cost repairs – products with major defects $5,000,000
Expected % of products sold during 2019 having no defects in 2020 85%
Expected % of products sold during 2019 having minor defects in 2020 13%
Expected % of products sold during 2019 having major defects in 2020 2%
Expected timing of settlement of warranty payments
– those with minor defect All in 2021 20% in 2021,
Expected timing of settlement of warranty payments those with
major defects 80% in 2022

3. Burdeos determined that part of its plant and equipment needed an overhaul – the conveyer
belt on one its machines would need to be replaced in about December 2021 at an estimated
cost of $250,000. The carrying amount of the conveyer belt at December 31, 2019 was
$140,000. Its original cost was $200,000.

4. Burdeos was unsuccessful in its defense of the peanut allergy case and was ordered to pay
$1,500,000 to the plaintiffs. As at December 31, 2020 Burdeos had paid $800,000.

5. Burdeos commenced litigation against one of its advisers for negligent advise given on the
original installation of the conveyers belt referred to in (4) above. In October 2020 the court
found in favor Burdeos. The hearing for damages had not been scheduled as at the date the
financial statements for 2020 were authorized for issue. Burdeos estimated that it would
receive about $425,000.

6. Burdeos signed an agreement with Craft Bank to the e Burdeos would guarantee a loan
made by Craft Bank to subsidiary, Burgis Ltd. Burgis’ loan with Craft B $3,200,000 as at
December 31, 2020.

QUESTIONS:
Based on the above and the result of your audit, answer the following
1. The warranty expense in 2020 is
a. $100,000 c. $400,000
b. $160,000 d. $230,000
2. The provision for warranties as of December 31, 2020 is
a. $580,000 c. $230,000
b. $480,000 d. $410,000
3. The provision for warranties to be reported as noncurrent as of December 31, 2020 is
a. $220,000 c. $150,000
b. $400,000 d. $330,000
4. The provision for warranties to be reported as noncurrent as of December 31, 2020 is
a. $80,000 c. $260,000
b. $150,000 d. $330,000
5. Total provisions to be reported in the statement of financial as of December 31, 2020 is
a. $480,000 c. $410,000
b. $1,180,000 d. $1,360,000

Bonds payable
Gumaca Corporation authorized the sale of $2,000,000 of 12%, 10 year debentures on January 1,
2015. Interest is payable on January 1 and July 1. The entire issue was sold on April 1, 2015, at
102 plus accrued interest.On June 30, 2020, reacquired and retired at 99 plus accrued interest. On
June 30, 2020, the remaining bonds were reacquired at 97 plus accrued interest and refunded with
an issue of P1,600,000 of 9% bonds which were sold at 100.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Use straight line
method to amortize premium or discount)
1. Total cash received from sale of $2 million bonds on April 1, 2015
a. $2,100,000 c. $2,040,000
b. $2,000,000 d. $2,120,000
2. Interest expense for 2015
a. $180,000 c. $157,241
b. $183,077 d. $176,923
3. Carrying amount of bonds payable as of December 31, 2015
a. $2,037,241 c. $2,036,923
b. $2,042,759 d. $2,043,077
4. Gain or loss on retirement of P1 million bonds on April 1, 2020
a. $19,744 gain c. $256 gain
b. $19,744 goss d. $19,828 gain
5. Gain or loss on retirement of remaining bonds on June 30, 2020
a. $39,231 loss c. $20,769 gain
b. $9,231 gain d. $39,310 gain