Question

Luxwood is a resident private company established in 2011 to manufacture quality furniture that is sold to retailers under several brand names and directly to the public. In respect of each task, the requirement is that you: Identify the issue/issues raised Identify and discuss the relevant provisions of the legislation, case law, ATO rulings and determinations of Australia. Advise the company what amounts are assessable or deductible for each Task. Note: Disregard GST and Small Business Entity related matters You will not receive marks for discussing these. No need to consider GST Task 2 Luxwood prides itself on its “no questions asked” refund policy for return of defective goods. It has gathered statistics over the previous 8 years since it adopted this policy and it concludes, as a reliable estimate, that of all its refunds under this policy, 60% are covered by supplier warranties. It bears the balance as a cost of doing business. In this respect the store has made the following entry in its journal for the year ended 30 June 2020: Dr. Profit and Loss 25,000 Cr. Provision for warranties 25,000 Narration: Being 40% of estimated refunds for claims in respect of defective goods sold during the year ended 30 June2020 for which no supplier warranty is available.

Answer 1

From the Information Provided in the Question, we came to know that Luxwood is a Resident Company which manufactures the Quality Furniture & sell it to Public & Retail Companies. Luxwood is purchasing the raw materials from suppliers.

Sometimes Luxwood may sold defective products to its buyers. For the defective goods sold, Luxwood has to refund the buyers. Suppliers has promised that it will bear 60% of the refund amount by themslves, so luxwood has to provide the provision for the remaining 40% of the refund. The entry for the adjustment of provision for warranty is as follows:

Provide for 100% refund & Record 60% as amount receivable from Suppliers & remaining 40% as expenses in profit loss.

Dr Profit & Loss Account 40%

Dr Supplier Account 60%

Cr Provision for Warranties 100%

In the above Question, a provision for warranty is created

Dr Profit & Loss Account 25,000

Cr Provision for Warranty 25,000

( Being no Suppliers warranty was provided, the entire provision is to be borne by Luxwood )

The entry recorded by the Luxwood is Correct.