Provisions and Contingencies

HeavyMachinery Co sells industrial equipment with a one-year warranty. Based on past experience, 5% of equipment sold will have major defects costing $1,000 each to repair, and 15% will have minor defects costing $200 each to repair. During the year, 1,000 units were sold. What is the expected value of the warranty provision required at year-end?

A public utility company is facing a lawsuit from a local community group for environmental damage. The company's lawyers advise that it is possible, but not probable, that the company will lose the case and have to pay damages of $5 million. How should this be treated in the financial statements?

SECTION A EcoMine Co operates a copper mine. Under local legislation, EcoMine is required to restore the site at the end of its 10-year useful life. The present value of the estimated restoration costs at the commencement of mining operations on 1 January 20X1 was $5,000,000. The discount rate is 8%. What is the total charge to the statement of profit or loss for the year ended 31 December 20X2 in respect of this environmental provision?

SECTION B - CASE 1: AeroTech Drones AeroTech Drones Co manufactures specialized agricultural drones. The year-end is 31 December 20X5. AeroTech sells its drones with a standard one-year warranty. Based on past experience, 80% of drones will have no defects, 15% will have minor defects costing $200 to repair, and 5% will have major defects costing $1,000 to repair. During 20X5, AeroTech sold 5,000 drones. What is the expected value of the warranty provision required at 31 December 20X5?

**Section A** LogisticsPro entered into a non-cancellable contract to lease a warehouse for 3 years. Due to a sudden shift to remote operations, the warehouse is now completely vacant and cannot be sublet. The present value of the remaining lease payments is $150,000. The cost to break the lease early is a penalty of $120,000. What provision should LogisticsPro recognize under IAS 37 for this onerous contract?

**Section B - Case 1: Nimbus Renewables** *Scenario:* On 1 January 20X4, Nimbus Renewables began constructing an offshore wind farm. The following costs were incurred: - Materials and components: $10,000,000 - Direct labor: $5,000,000 - Testing the turbines (net of $200,000 from selling power generated during testing): $800,000 - General administrative overheads: $1,200,000 By law, Nimbus must decommission the wind farm at the end of its 20-year useful life. The estimated future cost of decommissioning is $4,000,000. Nimbus uses a discount rate of 5%. The present value of $1 payable in 20 years at 5% is 0.377. Nimbus also leased specialized maintenance vessels on 1 January 20X4 for 5 years. The annual lease payment is $2,000,000 payable in arrears on 31 December. The interest rate implicit in the lease is 6%. The present value of an ordinary annuity of $1 for 5 years at 6% is 4.212. *Question:* What amount should be charged to finance costs in the statement of profit or loss for the year ended 31 December 20X4 regarding the decommissioning provision?