ADDIS ABABA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
Intermediate Financial
Accounting II Group Assignment
Section 3
Name ID Numbers
Getnet Kibretu UGR/ 3427/15
Kenenisa Getachew UGR/8621/15
Hermela Agalu UGR/8760/15
Kaleab Getachew UGR/3057/15
Gelana Defaru UGR/2917/15
Submitted to: Instructor Andualem Z.
Submission Date:22 /05/2025
ANSWERS TO QUESTIONS
3. 10q) The ability to defer settlement of short-term debt may be demonstrated by entering into a
financing agreement that clearly permits the company to refinance the debt on a long-term basis
on terms that are readily determinable before the next reporting date.
6. 24q) Under IFRS, companies may not record provisions for future operating losses. Such
provisions do not meet the definition of a liability, since the amount is not the result of a past
transaction (the losses have not yet occurred). Therefore, the liability has not been incurred.
Furthermore, operating losses reflect general business risks for which a reasonable estimate of
the loss could not be determined. By reducing income in good years through the use of
contingencies, companies can smooth out their income from year-to-year.
SOLUTIONS TO BRIEF EXERCISES
7. BRIEF EXERCISE 13-15
During 2015
Cash................................................................................ 4,000,000
Warranty Expense........................................................... 450,000
Warranty Liability.................................................................. 450,000
Sales Revenue....................................................................... 4,000,000
Warranty Liability.............................................................130,000
Cash...........................................................................................130,000
10. BRIEF EXERCISE 13-18
Cargo Company’s lawsuit claim represents a contingent asset because the
odds of winning the case are 75% (probable, but not virtually certain).
Contingent assets are not recognized on the statement of financial position.
11. BRIEF EXERCISE 13-19
Costs that should not be included in a restructuring provision include marketing costs to rebrand
the company image and expected future losses for keeping the plant open for another year.
12. BRIEF EXERCISE 13-20
Loss on Lease Contract.....................................................1,450,000
Lease Contract Liability......................................................... 1,450,000
SOLUTIONS TO EXERCISES
3. EXERCISE 13-13
During 2015
(a) Cash (500 X $6,000)..........................................................3,000,000
Warranty Expense...............................................................120,000
Warranty Liability.................................................................... 120,000
Sales Revenue........................................................................... 3,000,000
Warranty Liability..............................................................30,000
Cash, Inventory, Accrued Payroll............................................. 30,000
(b) Cash...................................................................................3,000,000
Sales Revenue.............................................................................. 2,840,000
Unearned Warranty Revenue....................................................... 160,000
Warranty Expense.............................................................30,000
Cash, Inventory, Accrued Payroll................................................. 30,000
Unearned Warranty Revenue...........................................40,000
Warranty Revenue [$160,000 X ($30,000/$120,000)].....................40,000
6. EXERCISE 13-21
1. Total warranty liability at December 31, 2015, is $5,000,000 as computed below
Expected warranty costs
% Units Cost per Unit Total Costs
No defects 60% 600,000 $0 $0
Major defects 30% 300,000 15 4,500,000
Minor defects 10 % 100,000 5 500,000
Total 100% 1,000,000 $5,000,000
2. The expected amount of $400,000 should be reported as income taxes
payable at December 31, 2015.
SOLUTIONS TO PROBLEMS
1. PROBLEM 13-11
(a)1. Loss from Uninsured Accident........................................250,000
Liability for Uninsured Accident.............................................. 250,000
2. Loss from Expropriation..................................................1,925,000
Allowance for Expropriation
[€5,725,000 – (40% X €9,500,000)]............................1,925,000
3. No entry required.
4. Loss on Lease Contract...................................................950,000
Lease Contract Liability.........................................................950,000
5. No entry required.
(b) 1. A loss and a liability have been recorded in the first case because
(i) the company has a present obligation as of the date of the financial statements as the result of
past events
(ii) it is probable that an outflow will be required to settle the obligation, and
(iii) a reliable estimate can be made. That is, the occurrence of the uninsured accidents during
the year plus the outstanding injury suits and the attorney’s estimate of probable loss required
recognition of a contingent liability.
2. An entry to record a loss and establish an allowance due to threat of expropriation is necessary
because the expropriation is imminent as evidenced by the foreign government’s communicated
intent to expropriate and the virtual certainty of a settlement from the government. That is,
enough evidence exists to reasonably estimate the amount of the probable loss resulting from
impairment of assets at the reporting date. The amount of the loss is measured by the amount that
the carrying value (book value) of the assets exceeds the expected compensation. At the time the
expropriation occurs,the related assets are written off against the allowance account. In this
problem, we established a valuation account because certain specific assets were impaired. A
valuation account was established rather than a liability account because the net realizability of
the assets affected has decreased. A more appropriate presentation would, therefore, be provided
for statement of financial position purposes on the realizability of the assets. It does not seem
appropriate at this point to write off the assets involved because it may be difficult to determine
all the specific assets involved, and because the assets still have not been expropriated.
