The provision for warranties at 31 December 2019 was calculated using the following assumptions: There was no balance carried forward from the prior year.

Estimated costs of repairs - products with minor defects P1,500,000

Estimated cost of repairs - products with major defects                              P9,000,000

Expected % of products sold during 2019 having no defects in 2020           80%

Expected % of products sold during 2019 having minor defects in 2020      15%

Expected % of products sold during 2019 having major defects in 2020        5%

Expected timing of settlement of warranty payments - those with minor defects       All in 2020

Expected timing of settlement of warranty payments - those with major defects           40% in 2020,     60% in 2021

During the year ended 31 December 2020 the following occurred:

1. In relation to the warranty provision of P675,000 at 31 December 2019, P300,000 was paid out of the provision. Of the amount paid, P225,000 was for products with minor defects and P75,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2020.

2. In calculating its warranty provision for 31 December 2020, Magic made the following adjustments to the assumptions used for the prior year:

Estimated cost of repairs - products with minor defects                  No change

Estimated cost of repairs - products with major defects                      P7,500,000

Expected % of products sold during 2020 having no defects in 2021             85%

Expected % of products sold during 2020 having minor defects in 2021       13%

Expected % of products sold during 2020 having major defects in 2021         2%

Expected timing of settlement of warranty payments - those with minor defects     All in 2021

Expected timing of settlement of warranty payments - those with major defects          20% in 2021, 80% in 2022

3. Magic determined that part of its plant and equipment needed an overhaul - the conveyer belt on one of its machines would need to be replaced in about December 2021 at an estimated cost of P500,000. The carrying amount of the conveyer belt at 31 December 2020 was P280,000. Its original cost was P400,000.

4. Magic was unsuccessful in its defense of the peanut allergy case and was ordered to pay P2,000,000 to the plaintiffs. As at 31 December 2020 Magic had paid P1,500,000.

5. Magic commenced litigation against one of its advisers for negligent advice given on the original installation of the conveyers' belt referred to in (4) above. In October 2020 the court found in favor of Magic. The hearing for damages had not been scheduled as at the date the financial statements for 2020 were authorized for issue. Magic estimated that it would receive about P500,000.

6. Magic signed an agreement with Choko Bank to the effect that Magic would guarantee a loan made by Choko Bank to Magic's subsidiary, UN Ltd. UN's Ltd. loan with Choko Bank was P3,000,000 as at 31 December 2020. UN Ltd. was in a strong financial position at 31 December 2020.

Based on the above and the result of your audit, answer the following:

1. The warranty expense in 2020 is?

2. The provision for warranties as of December 31, 2020 is?

3. The provision for warranties to be reported as current liability as of December 31, 2020 is?

4. The provision for warranties to be reported as noncurrent liability as of December 31, 2020 is?

5. Total provisions to be reported in the statement of financial position as of December 31, 2020 is?

Answer rating: 100% (QA)

1 The warranty expense in 2020 is the sum of the new estimated warranty costs for products sold in 2020 Warranty expense Expected of products sold in ... View the full answer