Question

Warranties

Focus plc offers a twelve month warranty on certain goods that it sells. The warranty is paid for at the time the sale is made and included in the Sales Revenues account. The full warranty is valued at 10% of the original sale price of the item and about half of the warranty cover has elapsed by the year end. The total on the Sales Revenue account at the year end stands at £10m.

The accountant proposes putting the full £10m in the Statement of Profit or Loss as revenues for 20X6.

State whether you agree with the accountant’s proposal regarding the matter mentioned above. You should explain your reasons for agreeing or disagreeing and explain any alternative treatments that you believe the accountant should use.

Answer 1

Here, Accountant's proposal regarding the warranty is wrong. Warrenty part of sale revenue should be taken as Provision for warreanty.

In contract law, a warranty is a promise which is not a condition of the contract or an innominate term ,A warranty is not a guarantee. It is a mere promise. It may be enforced if it is breached by an award for the legal remedy of damages.

here,  The full warranty is valued at 10% of the original sale price of the item and about half of the warranty cover has elapsed by the year end. The total on the Sales Revenue account at the year end stands at £10m.

Value of warrenty = Pound 10m * 10% = Pound 1m

while making the sale entry 9m can take as sale revene at that time. Then 1m should go to Provision for warranty..

Here , at the year end half of the warrenty cover has elapsed that mean @year end pound 500000 can be added with sale revenue at year end . balance pound 500000 should be the balance in provision for warrenty.

Only after elapsing this it can taken as sale income. or any warrenty expense comes during its one year period it should adjust there.