Question

Collingwood Pty Ltd has the following obligations:

• It has agreed to repair faulty surfboards that it has sold. Evidence indicates that of the 2,000 surfboards that were produced in overseas factories, about 20% use defective fibreglass that will need to be replaced at an expected cost of about $250 per surfboard.
• It has a policy of providing long service leave to its employees. Under the arrangement, if employees stay for a period of ten years then they are entitled to an additional 15 weeks of holidays. Collingwood Pty Ltd believes it can reliably estimate how much the current years operations have contributed to this obligation.
• Collingwood Pty Ltd has an amount owing to its overseas supplier of $70,000, which it expects to pay in the next month.
• Collingwood Pty Ltd has a bank loan of $500,000.

For the above transactions and events determine whether a provision should be recognised and provide a rationale for your response.

Collingwood Pty Ltd has the following obligations:

• It has agreed to repair faulty surfboards that it has sold. Evidence indicates that of the 2,000 surfboards that were produced in overseas factories, about 20% use defective fibreglass that will need to be replaced at an expected cost of about $250 per surfboard.
• It has a policy of providing long service leave to its employees. Under the arrangement, if employees stay for a period of ten years then they are entitled to an additional 15 weeks of holidays. Collingwood Pty Ltd believes it can reliably estimate how much the current years operations have contributed to this obligation.
• Collingwood Pty Ltd has an amount owing to its overseas supplier of $70,000, which it expects to pay in the next month.
• Collingwood Pty Ltd has a bank loan of $500,000.

For the above transactions and events determine whether a provision should be recognised and provide a rationale for your response.

Answer 1

Collingwood Pty Ltd has the following obligations:	Comment on provision
It has agreed to repair faulty surfboards that it has sold. Evidence indicates that of the 2,000 surfboards that were produced in overseas factories, about 20% use defective fibreglass that will need to be replaced at an expected cost of about $250 per surfboard.	Yes, provision will be required to be made. Based on the experience company expects that certain surfboards will have to be replaced therefore, company should create Warranty provision to the extent of $ 100,000 ($250 x 20% of 2,000 surfboards)
It has a policy of providing long service leave to its employees. Under the arrangement, if employees stay for a period of ten years then they are entitled to an additional 15 weeks of holidays. Collingwood Pty Ltd believes it can reliably estimate how much the current years operations have contributed to this obligation.	Yes, provision will be required to be made. Since company's policy is to provide long service leave to its employees, therefore provision should be recognised for specified number of employees who have completed 10 years of service. Also while determining the provision help of external experts can be relied upon like Actuaries.
Collingwood Pty Ltd has an amount owing to its overseas supplier of $70,000, which it expects to pay in the next month.	No provision will be required. Since company expects to repay the same in the next month, therefore liability will be paid off in next month.
Collingwood Pty Ltd has a bank loan of $500,000.	No provision will be required. Since company has obligation to pay this as per bank terms i.e As per repayment schedule or on demand as bullet repayment.