Question

(a)Based on MFRS 101 Presentation of Financial Statements, state FOUR (4) criteria where a liability should be classified as a current liability?

(b)Usaha Jaya Bhd has a RM50,000 short-term obligation due on 1 March 2020. The Manager discussed with its lender to extend the payment to 1 March 2022. The company’s reporting date is on 31 December 2019 and the financial statements are authorised for issuance on 1 April 2020.

     REQUIRED:

Discuss how the date of the agreement signed to extend the loan terms of the obligation’s maturity from 1 February 2020, to 1 March 2022 affected the classification of said obligation as current liability or non-current liability.

(c)Sintok Electrical Bhd provides a 2-year warranty for its stand fan. The fan was first sold in 2019 in which the company spent RM30,000 servicing warranty claims. At year-end, Sintok Electrical Bhd estimates that an additional RM50,000 will be spent in the future to service warranty claims related to 2019 sales.

REQUIRED:

Prepare Sintok Electrical Bhd’s related journal entries for 2019. (Assume the company’s financial year ends 31 December).

Answer 1

1) These are the four criteria were liability should be classified as current liability-:

(i) the liability is expected to be paid within the normal operating cycle

(ii) liability is solely for the purpose of trading

(iii) liability is expected to be paid within 12 months from the date of balance sheet.

(iv) the portion of the liability over which the Company does not have the legal right to defer it for more than 12 months.  

2) Signing of the date of agreement is very important for the classification of liability. If signing of date of agreement is not within issuance of financial statements then liability needs to be classified as current liability. And if it is signed before that then it will be classified as non-current liability. Hence the classification is totally depended upon the signing of agreement.

3) Repair Expenses A/c Dr. RM 30,000

To Cash A/c RM 30,000

(Being repair expenses actually incurred for the sale of product)

Provision for repair expenses (PnL) A/c Dr. RM 50,000

To Provision for repair expenses A/c (BS) RM 50,000

(Being provision needs to be created for future warranty expenses for current sales made)