ProvisionsCLcasessolutions.docVIP

Question #1 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 a parent within three years from the date of sale. On past experience, it has probable (i.e. more likely than not) that there will be some claims under the warranties. Present obligation as a result of a past obligating event? Sale of the product with a warranty gives rise to a legal obligation An outflow of resources?ProbableConclusionProvide for the best estimate of the cost of making good under the warranty of the goods sold by the end of the reporting period Question #2 After a wedding in 2006, ten people died, possible as the result of food poisoning from product sold by the entity. Legal proceedings are started seeking damages from the entity but it disputes a liability. Up to the date of approval of the financial statement for the year to 31 December 2006, the entity’s lawyers advise that it is probable that the entity will not be found liable. However, when the entity prepares the financial statements for the year to 31 December 2007, its lawyers advise that, owing to developments in the case, it is probable that the entity will be found liable. At 31 December 2006Present obligation as a result of a past obligating event? On the basis of the evidence available when the financial statements were approved, there is no obligation as a result of past eventsAn outflow of resources?ConclusionNo provisionAt 31 December 2007Present obligation as a result of a past obligating event? On the basis of the evidence available, there is a present obligation.An outflow of resources?ProbableConclusionProvision should be recognized Question #3 A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refund is ge