Peter (Television) Ltd gives a 2-year labour and parts warranty on all television sets that it sells. The company has the following revenue for its first 2 years of trading:

Based on the level of faults normal in the industry, managers make a provision of 5% of each year’s revenue for the cost of meeting claims under the warranty. The actual cost incurred during Years 1 and 2 on warranty work carried out is as follows:

Required:

(a) Show how the above information would be recorded in the financial statements of Peter (Television) Ltd.

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

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Year 1 2 Amount of revenue 4 400,000 500,000