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In 20×8,following events related to Entity A were noted: (1)Entity A sells goods with a
In 20×8,following events related to Entity A were noted:
(1)Entity A sells goods with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first twelve months after purchase If minor defects were detected in all products sold, repair costs of RMB 6 000 000 would result. Entity A’s past experience and future expectations indicate that ,for the coming year,60 per cent of the goods sold in 20×8 will have minor defects and 10 per cent of the goods sold in 20×8 will have major defects.
(2)In November20×8,a customer sued Entity A and made a claim for damages of RMB 2 500 000,as Entity A failed to deliver the goods to the customer in time according to the delivery term of relevant sales contract. When Entity A prepared the financial statements for the year ended 31 December 20×8,its lawyers advised that it was probable that Entity a Would be found liable for making a payment of RMB 2 000 000 to the customer for compensation.
(3)Under new environment protection legislation, Entity A is required to fit smoke filters, which costs about RMB20 000 000,to its factories by 30 June 2008.Entity A has not fitted the smoke filters at 31 December 2008.Based on the best estimate of the management of Entity A, it is more likely that Entity A will be imposed a penalty of RMB 10 000 000.
(4)Entity A is required by law to overhaul its equipments once three years. The estimated remaining useful life of the equipments is 18 years. Entity A just spent RMB 6 000 000 in overhauling is equipments in 2007.
(5)Entity A entered into a sales contract with a customer in November 2008 to sell an equipment at the price of RMB 50 000 000.According to the sales contract, Entity A shall deliver the equipments to the customer in the end of 2009 and the amount of penalty is RMB 600 000 if Entity A or the customer fail to fulfill the contract. Entity A’s original estimated cost of fulfilling the sales contract is about RMB 45 000 000.However,due to the increase of the purchase prices of relevant raw materials, the estimated cost of fulfilling the sales contract increased to RMB 55 000 000 in the end of 2008.No inventory has been prepared by Entity A for the production of the equipment by the end of 2008.
Requirement:
According to the events described above, determine whether any provision should be recognized in Entity A’s financial statement for the year ended 31 December 2008.If any provision should be recognized, calculate the amount of provision and prepare related journal entries.
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