A car dealership also owns a workshop that it uses for servicing cars under warranty. In

preparing its financial statements, the car dealership needs to ascertain the provision of a

one year warranty that it would be required to provide at year-end. The entity's past

experience with warranty claims is as follows:

70% of cars sold in a year have zero defects.

18% of cars sold in a year have normal defects.

12% of cars sold in a year have significant defects.

The cost of rectifying a "normal defect" in a car is $3,000. The cost of rectifying a

"significant defect" in a car is $8,000.

A total of 800 cars were sold in the year ended December 31, 20x5.

Required -

a) Compute the amount of "provision for warranty" needed at December 31, 20x5.

b) Assume that the car dealership also provides their customers with a two year

warranty that starts after the end of regular warranty period. The cost of an

extended warranty is $3,200 and 300 of the customers who purchased a car in

20x5 also purchased the extended warranty. Management believes that the

percentage of work done on the extended warranties is 35% in the first year and

65% in the second year. Prepare all journal entries with regards to the extended

warranty for the years 20x5 20x8. Assume that all sales of cars took place on

December 31, 20x5.