Question 1 (50 marks) Mr. Louis Wong is the newly employed assistant accountant

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Question 1 (50 marks) Mr. Louis Wong is the newly employed assistant accountant of Tin-Shuo Limited ("TSL"). TSL is principally engaged in the manufacture and wholesale of branded watches and timepieces for domestic and overseas markets. Louis is preparing the financial statements for the year to 31 March 2017, he is uncertain of the correct accounting treatments for the following items: TSL promised to provide a 12-month warranty service to all watches and timepieces sold from the invoice dates. The management, based on past experience, estimated that warranty costs would depend on the extent of defects: $200,000 in case of minor defects and $500,000 in case of major defects (assume all products would have suffered minor or major defects). The management expected 85% of the products will suffer no defects, 12% of the products will suffer minor defects that needed fine tuning and 3% of goods will suffer major defects that needed major repair or replacement of spare parts. There was no outstanding warranty cost provision in the books of TSL at 31 March 2017. Louis does not make provision for warranty costs at 31 March 2017 as the expenses have not yet incurred at financial reporting date. 1. TSL acquired a delivery truck on 1 April 2014. The cost of the delivery truck, S500,000, was incorrectly charged to distribution expenses for the year ended 31 March 2015. Louis has corrected the error against the current year's selling and distribution expenses. TSL depreciates its motor vehicles at 20% on cost. 2. 3. The management declared a final dividend of s180,000 on 23 April 2017. The dividend will be paid on 10 July 2017. Louis wondered whether provision should be made in the financial statements since dividends were declared out of the current year's profit. 4. On 1 April 2016, TSL acquired new plant and machinery for $50 million. The installation cost is $2 million. The estimated useful life of the plant and machinery is 5 years. After that, the plant and machinery would require a complete overhaul at an estimated cost of SS million. Louis has charged the installation cost as expenses for the period and would like to make a provision of S1 million for overhaul costs in the

Explanation / Answer

1. As details provided by the managment of TSL Ltd. , Company need to pay $ 2,00,000 in case of minor defects and in case of major defects $ 5,00,000 needed to pay. As they have expected 85% of watches & timepieces have no defects, 12% have minor defects & 3% have major defects.

So in this situation TSL Ltd. has to make provision at the end of financial year for 12% of minor defects & 3% of major defects of total sales units.

2. As informed Truck purchsed on 01.04.2014 and on same date company debited the same to Distribution expenses. Same has been corrected against Selling & distribution expenses of current year.

So in such situation reversal entry should be done by Debiting the Truck account and crediting the selling & distribution expenses.

And after that last three financial year depreciation has been provided from truck account @ 20% (i., $ 5,00,000 *20/100).

3. No provision for dividend declared on 23.04.2017 needed to make in books of Financial year 2016-17 even if same has been declared from same financial year.

4. Plant & Machinary has purchased on 01.04.2016 with 50 $ million. Installation cost has $ 2 million incurred with same. Company entered the same as expenses incurred of same finacial year which is wrong. Installation expenses must be added to the cost of plant & machinary cost.

Provision of 1 $ million to make overhual cost covered after 5 years for next 5 years is correctly accounted.

5. As informed company has taken on lease, a premises for 4 years starting on 01.04.2016. Lease payment for every year is $ 4,00,000.

Company spent $ 5,00,000 on renocvation of property which has been correctly provided on current year expenses.

Compnay need to make provision of $ 80,000 to make property to original condition from renovation after 4 years when lease agreement will end.

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