B11.1 [S]

The Washing Machine Repair Company gives a warranty of no-cost rectification of unsatisfactory repairs. It has turnover from repair contracts recorded as:

Based on previous experience the manager makes a provision of 10% of turnover each year for warranty costs. In respect of the work done during Years 1 and 2, repairs under warranty are carried out as follows:

Required

(a) Show how this information would be recorded in the financial statements of the Washing Machine Repair Company.

(b) Explain how the financial statements would appear if the company made no provision for warranty costs but charged them to income statement (profit and loss account) when incurred.

Transcribed Image Text:

Year Amount of turnover 12 3 80,000 90,000