On 1 January 2020 Beta Limited entered into a one year contract for the rental of a shop, as part of Betas retail operations. As a result of the corona virus pandemic, Beta closed the shop on 30 April 2020. It does not anticipate it will be able to open the shop again in 2020. However it is required under the rental contract to keep paying rent on the shop until 31 December 2020.

Required:

Identify and explain the appropriate treatment for the contract in the financial statements of Beta at 30 June 2020, in accordance with AASB 137 Contingent Liabilities and Contingent Assets. (3 marks)

Part B

Washwell Ltd is a manufacturer of washing machines. When each of its washing machines is sold, Washwell provides a warranty to the purchaser of the washing machine to repair, refund or replace the washing machine for any manufacturing defects that become apparent within a year of the date of sale. Based on past experience, Washwell is predicted to have 10% of the washing machines returned for manufacturing defects. Sales for the year to 30 June 2020 were $3,500,000.

Required:

i) Applying the criteria in AASB 137, explain whether Washwell should recognise a provision for warranty at 30 June 2020. (4 marks)

ii) Prepare an appropriate journal entry to recognise the provision for warranty, assuming that a provision should be recognised. (3 marks)