Reference no: EM132616495

Scenario 1: Greenwood Construction Ltd is a civil engineering company that specialises in the design and construction of transportation infrastructure. In late 2019, Greenwood Construction Ltd signed a contract with the NSW state government to construct 20 km of light rail through the Sydney CBD. Greenwood Construction Ltd was to be paid $30 million by the NSW state government for the project. Greenwood Construction Ltd estimated that the project would take three to four years to complete, it would cost $20 million.

On 1 July 2020 Greenwood Construction Ltd commenced work on the project. During the year ending 30 June 2020, Greenwood Construction Ltd purchased $3 million of materials. By 30 June 2020, Greenwood Construction Ltd had completed 5 km of the project at a cost of $6 million. The cost of $6 million comprised $2 million of materials and $4 million of labour costs.

Scenario 2: Orange Mobile Ltd designs, develops and sells mobile phones throughout Australia. Orange Mobile Ltd gives warranties at the time of sale to purchasers of its mobile phones. Under the terms of the contract for sale, Orange Mobile Ltd undertakes to make good, by repair or replacement, any manufacturing defects that become apparent within two years from the date of sale. Based on experience, it is probable (more likely than not) that there will be some claims under the warranties.

During the year ended 30 June 2020, Orange Mobile Ltd sold 10,000 mobile phones to customers. The ending inventory of Orange Mobile Ltd as at 30 June 2020 comprised 2,000 mobile phones.

Based on past experience, Orange Mobile Ltd believes that:

• 80% of the mobile phones sold will require no warranty repairs,
• 15% of the mobile phones sold will require minor repairs costing $120 per mobile phone, and
• 5% of the mobile phones sold will require major repairs or replacement costing $900 per mobile phone.

Required

Problem (a) For Scenario 1, explain how, as at 30 June 2020, Greenwood Construction Ltd should account for (1) the $6 million cost incurred during the year and (2) the $1 million of unused materials. Justify your answer by reference to the relevant conceptual framework definitions and recognition criteria.

Problem (b) Scenario 2: Apply both the definition and recognition criteria for a liability from the AASB's Framework for the Preparation and Presentation of Financial Statements and explain why or why not Orange Mobile Ltd should recognise a warranty liability on 30 June 2020 in relation to:

1. The 10,000 mobile phones sold during the year ended 30 June 2020, and
2. The 2,000 mobile phones unsold (held in inventory) as at 30 June 2020.