Case study background

Assume that you are a graduate accountant working for Tucker and associates a public accounting firm situated at 55 York Street, Sydney, NSW 2000. The manager of your firm, Mr Adam Tucker has asked you to draft a letter in response to an email received from a client Joe Black, the managing director of Sotoma Pty Ltd, raising a few accounting issues regarding his company see the copy of the email on the next page.

Here are the two issues we are most concerned about:

1. Sotoma Pty Ltd gives warranties at the time of sale to purchasers of its products (computer chips). Under the terms of the contract for sale, the manufacturer undertakes to remedy, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. As this is the first year that the warranty has been available, there is no data from the firm to indicate whether there will be claims under the warranties. However, industry research suggests that it is likely that such claims will be forthcoming. It would be much appreciated if you could kindly advise the accounting team whether the company should recognise a provision.

2. On July 2020, Sotoma Pty Ltd noticed that a number of its employees have been with the company for a number of years including some who have actually been working for more than 10 years. The company has always provided annual leave and sick leave to its employees. However, our accounting team is not sure whether these employees are entitled to any other employee benefits. It would be much appreciated if you could give the accounting team some clarification on this matter and how to deal with this in our accounts. Question :Write a letter of advice in response to a few key accounting issues raised by a Managing Director of a company