Mike uses high-quality components in manufacturing of its water pipes. However, some manufacturing defects are unavoidable. For the year ended 30 June 2022, Mike recorded $2,090,000 (GST Inclusive) in sales of which $52,250 (GST Inclusive) were sales returns. Based on prior period, approximately 1% of net sales are claimed as warranties. The owners believe the warranty amount should be expensed in the period when the claims take places which is normally in the period following the sale.

With reference to the Conceptual Framework, explain whether you agree with the owners on recording of warranties as an expense in the period the claims are made. If not, explain how warranties should be recorded. Calculate the amount of warranty expense incurred and provide a double-entry to record a provision for warranties for the year ended 30 June 2022.