ABC Manufacturing Ltd (ABC) is a diverse manufacturing group in the electronics sector with its headquarters in Australia. It has a 31 December year end and is listed on the Australian Securities Exchange.

One of ABCs divisions manufactures a range of digital entertainment products. Under the terms of the contract for sale, the manufacturer must provide a standard one-year warranty, undertaking to make good, by repair or replacement, manufacturing defects that become apparent within a one year from the date of sale. On past experience, it is more likely than not that there will be some claims under the warranties.

During 2018, ABC sold 500 units of a new line of high-performing web cams for $500 each. It has reviewed its past experience based on sales of similar web cams and expects that 40% of the items sold will have major defects incurring a warranty cost of $25 per unit sold. It is estimated that 35% of items sold will have minor defects and will incur a warranty cost of $15 per unit sold. 25% of products sold will have no defects. ABC expects these costs to be incurred evenly over the warranty period.

The companys accountant believes that the warranty costs for the new web cams should be recognised in the Income Statement at the time they are incurred as there is no history of cost incurred specific to this product.

Required:

1. Discuss if the company has an obligation that meets the criteria stipulated in AASB 137 Provisions, Contingent Liabilities and Contingent Assets and Conceptual Framework.
2. Calculate warranty cost per items sold for the year ended 31 December 2018.

3. Prepare the journal entry to record the estimated warranty expense based on the units sold.