QUESTION $3($Advanced $$ test$/$exam level question$)$

Laptopz Ltd is a manufacturer of computer hardware and software, and related tech gadgets. The company$$s manufacturing operations are based in Auckland where it owns and occupies property with a factory and warehouse. The company also has an administrative office in Hamilton, and rents offices in Christchurch, Dunedin and Tauranga from which sales representatives sell the products to local retailers.

The company is in the process of preparing its financial statements for the year ending $31$ August $20$x$5$ and has provided you, the new assistant financial accountant, with the following information:

$1.$ Machinery

Laptopz used Machine A in the production of its hardware products. Due to the fast pace of the technology industry management decided in the current year that production needed to be improved. They therefore introduced new equipment which has increased production and design capacity and consequently decided to sell Machine A$.$

Machine A had a carrying amount of CU$1,250,00$ on $28$ February $20$x$5$ when it was sold. The machine had an original cost of CU$2,500,000$ when it was acquired on $1$ March $20$x$2.$ This machine has never been impaired.

A new machine, Machine Z$,$ was acquired on $1$ January $20$x$5$ for CU$4,500,00.$ The machine required a complex installation process in order to operate with the existing production line equipment already in use. Installation of Machine Z was completed on $1$ March $20$x$5$ to ensure production could continue uninterrupted after Machine A was sold. Machine Z was expected to be used for $8$ years and have a residual value of CU$200,000$ at the end of its useful life. Laptopz is under obligation to dismantle and remove Machine Z at the end of its useful life and due to its size and complexity this will be a complicated process. Management expects the dismantling of the machine to cost around CU$1,500,000$ based on quotes obtained from the supplier. These estimates were confirmed at $31$ August $20$x$5$ and did not change.

$2.$ Inventory

Inventory at the respective reporting dates consisted of raw materials, work in progress and finished goods as shown below:

Included in inventory at $31$ August $20$x$5$ was $2,835$ units of Techno Gadget $101,$ classified as finished goods inventory. No work in progress or raw materials related to this product existed at year end. The normal selling price of Techno Gadget $101$ at the reporting date was CU$500$ each, which earned the company a gross profit margin of $50\%$ on sales.

On $2$ September $20$x$5$ management held a meeting with the sales director and it was noted that Techno Gadget $101$ had suffered significant losses in sales in the recent months. This decrease in sales was due to a new product on the market sold by a competitor, King Pin. As a result, management decided to offer a discount of $75\%$ on the normal selling price of Techno Gadget $101.$ This resulted in a modified cost to sell for units on hand to an amount of CU$35$ per unit.

On $5$ September $20$x$5$ management instructed its lawyers to investigate the matter and it was found that the design of King Pin$$s competing product had potentially infringed on the patent design held by Laptopz. Management laid a claim against King Pin on $7$ September $20$x$5$ for damages of CU$2,500,000$ on the basis of lost revenue. The company$$s lawyers are of the opinion that the court case is likely to be successful and a verdict should be reached within the next two years.

$3.$ Warranty provisions

Laptopz offers a warranty for repairs on its products within a year of purchase. The warranty does not cover negligent damage caused by the customer. During the year repair costs of CU$850,000(20$x$4$:CU$975,000)$ were paid and have been correctly accounted for in the draft financial statements. The following balances have been included in the draft financial statements for the year ending $31$ August $20$x$5$:

The financial statements of Laptopz Ltd are expected to be authorised for issue on $15$ October $20$x$5.$

Laptopz is able to negotiate finance with the local bank at a risk adjusted $9\mathrm{.}5\%$ per annum.

REQUIRED:

a$)$ Prepare all the journal entries relating to the recognition of Machine Z and any subsequent adjustments for the year ended $31$ August $20$x$5.$ Dates are required but narrations and closing entries are not required. If you consider no adjustments then you are required to justify your answer.

b$)$ Advise management of Laptopz Ltd on the issues arising from King Pin$$s new product. Your answer should provide calculations and the impact the product will have on the amounts recognised in the financial statements for the year ended $31$ August $20$x$5.$ Your answer must deal separately with i$)$ the effects on inventory and ii$)$ the correct treatment of the claim against King Pin.

c$)$ Prepare the disclosures for provisions as required by IAS $37$ for the financial statements for the year ending $31$ August $20$x$5.$ Comparatives are not required.