Reference no: EM132929220

Campus Ltd's financial year end is on 31 December. The date of authorisation of issue of its financial statements is 31 March 2013. The following are scenarios for which accounting entries have been made for the year ended 31 December 2012.

(a) Campus Ltd signed an agreement to lease premises for its new factory for five years on 20 October 2012. The lease agreement requires the company to restore the premises to the original condition at the end of the lease. The eventual costs relate to the restoration of the alterations made to the premises. As at 31 December 2012, the company had already incurred $15,000,000 in renovating and decorating the new premises. The company estimates that it will incur $2,000,000 to restore the premises to the original condition.

(b) Campus Ltd sells a new product called "Power Z". To enhance customers' confidence on the quality of the goods, the company sells Power Z with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first 12 months after purchase.

For the year ended 31 December 2012, if minor defects were detected in all Power Z sold during the period, repair costs of $1 million would result. If major defects were detected in all Power Z sold, repair costs of $6 million would result. Campus Ltd's past experience and future expectations indicate that, for the Power Z sold in 2012, 80 percent of the Power Z sold will have no defects, 15 percent of the Power Z sold will have minor defects and 5 percent of the Power Z sold will have major defects.

Problem 1: Briefly explain the appropriate accounting treatment(s) for each scenario. Prepare the relevant journal entries and/or notes to the accounts for each scenario in the preparation of financial statements for the year ended 31 December 2012. Narrations to journal entries are not required.