Question

ISHONI - CURRENT LABILITIES (16 marts Required: a) in your own words (de answer the following questions: in your own words do not simply copy response from the is it important for business to classify the little between current liabilities? (3 marks) other art in their stors. It will n o t than thoi'll know what kind of of short term ovigations they have to take care of. Vice vosa for Non-cumont. It piso holes with woreauty lion there. ii. If electronic manufacturing companies such as Apple and Samsung provide customers with a one- year warranty on their products, when should Apple and Samsung recognize the warranty for these products? How do these companies recognize the warranty.e. what accounts should be debited and credited to recognize the warranty?) (3 marks) Apple and Samsung should rewgnize the wormenty within the instoad of writing for the next business period. The companies as the amount of the expense depending on what they can expect goods or services

Answer 1

What is importance of classification between current and Non current Liability – please see below explanation to justify above point :

In any financial report , as per Standard , GAAP , IFRS disclosure , company has to classify Liability in to current and Non current part .

While reviewing Financial statement by multiple stakeholders , they mainly focus on companies solvency , liquidity , working capital position . As per disclosure and standard , any liability, which company can pay off with 1 year time – must be disclosed under “ current Liability”

Company as well as analyst while reviewing number must see movement of working capital and solvency position of company , To derived solvency position, we need to determined current Liability amount which will be payable 1 year or less than that . We need to see companies cash position to meet short term liability and determined solvency ratio

In case of Long term liability , which maturity more than Year , we need to bifurcate long term liability and need to find out “short term position of Long term Liability” . This classification will help management to understand cash availability to meet short term liability+ current posrtion of long term liability .

Company as per IFRS 9 disclosure of long term liability , borrowings – need to find out repayment period and categorised the same in to multiple year with charge of Interest .

Samsung –Detail Note on Warranty cost , provision , creation ---

As per Audited report of Samsung , company make provision of warranty on past performance basis . The company recognised provision for warranty on product sold . The company accrued provision for warranty on the basis of best estimate to settle future and existing claims

The company accrues warranty reserve for estimated cost of future service, repair , recalls , and obviously based on past historical experience

Warranty cost normally parked under “ Selling and Admin Expenses “

How we recognised warranty as per IFRS 15 – revenue recognition standard as below

Most important change under IFRS 15 is to recognised expenses of warranty cost . As per IFRS 15 , revenue recognition based on concept of performance obligation . We need to see whether product is being treated as separate performance obligation, then treat them separately , recognition methid must be different .

In case of Warranty, presently its divided into two parts – Assurance base Warranty and service type warranty

Assurance base warranty doe not give any separate performance obligation . They are recorded transaction on “ accrual basis “

Where as Service Type warranty represents – they provide some extra service . Customer wants this service ( extended warranty ) and treated as separate performance obligation

Journal entry should be as below :

In case of Assurance base warranty – pass below journal entry through provision account :

Expenses – Warranty Repair A/c --- dr

Provision for Warranty Repair A/c – cr

In case of warranty repair happen in 2 years , we should debited provision and accounted actual expenses

Also remember that any discounted cost due to time period , it must be unwinding accordingly

Where as in case of Warranty based on “ performance Obligation” and trated as separate contract , we need to create contract Liability

So We need to account following JE :

Cash A/c dr

Revenue from sale of Asset A/c – Cr

Contract Liability A/c --- Cr

Now we need to recognised contract Liability to transfer amount to Revenue from Warranty sales

Contract Liability A/c --- Dr

Revenue from Warranty Sales A/c – Cr

As per UFRS 15 , any cost of warranty should be accounted as “ contract cost”