1. Tau is currently preparing its financial statements for the year ended 31 March 2020. The board has met to discuss the following issues:

Some of the products sold by Tau are sold with warranties enabling customers to return faulty goods within 2 years of purchase. Tau will either repair the product or refund the sales value to the customer. During the year the sales value of products sold with such warranties totaled $300,000. Based on past experience it is anticipated that 20% of these products will be returned under the terms of the warranty.

Of the goods that are returned it is expected that 5% will be beyond repair and Tau will need to refund the full sales value to the customer.

The remaining 95% of returned goods will be able to be repaired. This will cost Tau, on average, 30% of the items' sales price. Some of the goods that have been sold this year have already been returned under the terms of the warranty. Tau has incurred costs of P5,000 in respect of these items.

As of 31 March 2019, Taus financial statements showed a provision of $14,000 in respect of warranty costs. This was made up of $4,000 in relation to goods sold during the year ended 31 March 2018 and $10,000 in respect of goods sold during the year ended 31 March 2019. The warranty in respect of items sold during the year ended 31 March 2018 has expired as of 31 March 2020.

During the year ended 31 March 2020, $3,000 of costs were incurred in respect of warranty claims made in relation to goods sold in the year ended 31 March 2019.

Explain how this matter should be dealt with in the financial statements of Tau in the year ended 31 March 2020. (Your answer should quantify amounts where possible.)

(12 marks)