Rill Outdoor: warranties, claims and reporting judgement

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Past sales with warranties create a present obligation for covered faults.
• Settlement is assessed across the warranty population, not by requiring every individual item to be faulty.
• The supplied experience provides a basis for a reliable estimate.
• Expected cost per item = 0.80 x 0 + 0.15 x 100 + 0.05 x 500.
• The result is $40 per item.
• For 1,000 items the estimate is $40,000.
• Recognise a $40,000 warranty expense and provision, assuming no other accounting adjustment.
• The probabilities total 100 percent; do not apply them again after deriving the population total.

Marks counted: 0 of 8

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• The delivery accident is a past event.
• The advisers confirm a present obligation rather than merely a possible obligation.
• Payment is probable and the supported best estimate is reliable.
• Recognise a $120,000 expense and provision for the legal claim on these facts.
• Do not automatically multiply $120,000 by an invented probability; the case supplies the supported best estimate.
• The $70,000 maintenance plan concerns future expenditure.
• No work or other obligating event has created a present obligation at the reporting date.
• Do not recognise a maintenance provision merely to allocate cost to a convenient year.

Marks counted: 0 of 8

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• The compensation claim is analysed separately from the liability.
• Its receipt is probable but not virtually certain.
• A probable contingent-asset inflow supports disclosure.
• Do not recognise a $60,000 asset on these facts.
• Recognition would be appropriate when receipt becomes virtually certain and it is no longer contingent.
• The provision recognition threshold cannot simply be reused for the contingent asset or used to justify netting the claims.

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Omitting the legal provision understates liabilities by $120,000.
• It also overstates profit by $120,000 on the assumptions given.
• Recognising the unsupported compensation asset overstates assets and profit by $60,000.
• Together these proposed treatments overstate profit by $180,000 before any warranty correction.
• The warranty provision adds a separate $40,000 expense and liability.
• Explain the recognition evidence and propose the required corrections.
• Document the advice, assumptions and pressure, and follow appropriate internal escalation.
• Seek relevant professional or ethical advice if the issue remains unresolved; do not assume the target justifies misleading reporting.

Marks counted: 0 of 8