Warren Industries manufactures and retails domestic appliances. The business had prepared draft accounts by 21.2.2012 and seeks your advice on how they should account for the following claims in the accounts for the year ended 31.12.2011:

(a) The audit fees for the year ended 31.12.2011 (£15,000 in the preceding year) remain to be negotiated.

(b) Holiday pay (usually ranging between £60,000 and £72,000) is yet to be calculated and accounted for.

(c) A claim for damages, at £40,000, is received from a customer on 7.3.2012 in respect of injuries sustained within the company premises on 29.11.2011. The legal advisers are of opinion that the company will be held liable for an amount probably of around £20,000 because of its failure to display a ‘wet floor’ sign.

(d) The domestic appliances are sold under warranty by which the company undertakes to either remedy at no cost to the customer or to replace an appliance, should any manufacturing defects become apparent within six months of the date of sale. As at 31.12.2011, £6,240,000 of sales are within the warranty period.

(i) The company’s experience in previous years has been that 80% of the appliances sold had no defect, 15% had minor defects and about 5% required replacement.

(ii) Based on this experience it estimated that if minor defects are detected in all appliances sold, it would cost £400,000 to rectify. If major defects are detected in all appliances sold it would cost £5.2 million to replace the appliances.

(e) On 18 February 2012 the company received notification that a customer has filed action against the company claiming £1 million on the premise that an electrical fault in the appliance sold by the company was responsible for the electrocution of his wife. The company solicitors are of the opinion that the claim is unlikely to succeed because the company’s appliances are produced strictly in accordance with British Standards and are rigorously tested prior to delivery.

Required: 

Advise the company on the accounting treatment, identifying whether each claim should be accounted for as an accrued liability or a provision. State clearly how each satisfies the criteria for recognition as an accrual or provision.