End of Chapter Problem 16.3 Euro Classics Ltd has been operating a successful business for many years specialising in servicing and reconditioning repairs for classic European automobiles. Serv ng costs $900, while reconditioning engines costs $1,?00. The business has a reputation for good customer service, an important feature of which is the 12 months parts and labour written warranty provided with each service. On 30 June 2010, the owners decided to introduce the practice of prowding for warranty expenses at year-end, thereby establishing a warranty expense in the year the vehicles are serVIoed or reconditioned, and setting up a provision to cover future warranty expenses as they occur. Past records have been examined, and It has been established that, on average, one In twenty vehicles are subject to a claim under the warranty offered. The costs of warranty have amounted to $500 for serviced vehicles and $1,140 for reconditioned vehicles. During the year ended 30 June 2018, 590 vehicles were serviced and 310 engines were reconditioned. During the year ended 30 June 2019, 26 serviced vehicles and 18 reconditioned engines were repaired under the warranty. The costs of warranty work carried out by Euro Classics were all paid in cash. During the year, 800 vehicles were serviced and 280 engines were reconditioned. At 30 June 2019, it was decided that warranty costs in the following year would increase by 5%. (Ignore GST.) Credit Provision for we rra nty V (T o adjust provision for future wananty costs) Solution End of Chapter Problem 16.3 Service 300 x 0.05 x $525 : $21,000 Recondition 230 x 0.05 x $1,197 : $16,758 + $1,100 under-provision for prior year's warranties