You have been provided the following information for CampingSA Ltd , a company that produces and sells a high quality canvas tents. The business has a financial year-end of 30 June. The business measures inventory on the weighted average cost allocation basis and uses the perpetual inventory recording method.

Question

On 1 July 20.19, the area around CampingSA Ltd’s production plant was declared a protected wetlands area which is situated around St Lucia in KZN. CampingSA Ltd will continue to produce from the same factory, as they agreed to rehabilitate the area when the business moves. On 1 July 20.19, the cost of rehabilitation at the end of the estimated useful life of the factory of 15 years, is estimated at R6 million. The present value of R6 million discounted over 15 years, at a market-related pre-tax interest rate of 8%, amounted to R1 647 228 on 1 July 20.19.

CampingSA Ltd is being sued by a customer. The customer suffered an injury due to a tent collapsing while they were sleeping in it. The matter has gone to court. CampingSA Ltd’s lawyers advised that due to the extremely high winds and poor weather conditions when the camping accident happened it is unlikely that the customer will win the case. The lawyers have estimated that, in the unlikely event that CampingSA Ltd loses the case, they could pay a maximum of R70 000.

CampingSA Ltd provides a one- year warranty at the point at which it sells its products. Under the terms of the warranty CampingSA Ltd undertakes to replace or repair products found to be defective within a year of the date of sale. As at 30 June 20.19, the warranty balance amounted to R47 500. During the year ended 30 June 20.20 CampingSA Ltd paid R42 500 to repair or replace products under warranty. Based on CampingSA Ltd’s past experience, approximately 5% of its goods sold are returned with defects. The sales incurred this year amounted to R1 060 000. The provision for warranty must still be journalise. Assume that the effect of discounting for warranty cost is immaterial.

Ignore all tax implications.
 
REQUIRED:
With reference to point 1 above, prepare the relevant note to the annual financial statements of CampingSA Ltd for the year ended 30 June 20.20.
CAMPINGSA LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.20
Provision for Rehabilitation costs

20.20
Rand
Balance on 30 June 20.19
Provision made during the year
Utilisation of provision during the year
Unwinding of discount
Balance on 30 June 20.20

GPT-4o mini · Answer

Here is the relevant note to the annual financial statements of CampingSA Ltd for the year ended 30 June 20.20, specifically addressing the Provision for Rehabilitation Costs:

CAMPINGSA LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.20

Provision for Rehabilitation costs

                                                            20.20
                                                            Rand
Balance on 30 June 20.19                               1 647 228
Provision made during the year                       -
Utilisation of provision during the year            -
Unwinding of discount                                      131 778 (1)
Balance on 30 June 20.20                             1 779 006

(1) Unwinding of the discount is calculated as follows:
   Present value of R6 million at 8% over 15 years = 
   R1 647 228 x 8% = R131 778

Explanation of Each Line Item:

Balance on 30 June 20.19: The initial provision recognized for rehabilitation costs as of the beginning of the financial year, which is the present value of R6 million as per the information provided.
Provision made during the year: No additional provision made in the financial year as there was no change in the estimated cost.
Utilisation of provision during the year: There was no utilization of the provision during the year since the rehabilitation has been planned for the end of the factory's useful life in 15 years.
Unwinding of discount: This represents the increase in the provision due to the passage of time, resulting in additional costs recognized in the financial statements as the present value amount grows closer to the estimated future cash outflows. The amount is calculated based on the effective interest rate applied to the opening balance.
Balance on 30 June 20.20: The ending balance will include the unwinding of the discount, reflecting the updated provisional amount to be recognized in the subsequent years until the rehabilitation is performed.

Note: The figures presented will reflect the proper accounting treatment of the rehabilitation provision under the applicable reporting standards such as IFRS or local GAAP.