Redfern Limited commenced business on 1 July 2019 and sells high-quality video recorders for $1,500 each with a two-year labour and parts warranty. Experience shows:

• 82% of video recorders do not require repairs.
• 7% require minor repairs (costing $120 per unit) in the first year of sale date.
• 1% require major repairs (costing $750 per unit) in the first year of sale date.
• 8% require minor repairs (costing $160 per unit) in the second year of sale date.
• 2% require major repairs (costing $740 per unit) in the second year of sale date.

Accounting records show:

• 2,800 video recorders were sold during the year ending 30 June 2020 and ending inventory as at 30 June 2020 comprised 600 video recorders.
• 3,200 video recorders were sold during the year ending 30 June 2021 and ending inventory as at 30 June 2021 comprised 800 video recorders.

It is assumed that the expenditure on all repairs occurs at the end of each accounting period (i.e., 30 June) and the risk-free discount rate for both years (based on government bonds) was 5% for one-year bonds and 6% for two-year bonds.

During the year ended 2020:

• 110 video recorders required minor repairs at $120 per unit.
• 26 video recorders required major repairs at $750 per unit.

During the year ended 2021:

• 140 video recorders from sales made in 2020 required minor repairs at $155 per unit.
• 60 video recorders from sales made in 2020 required major repairs at $710 per unit.
• 80 video recorders from sales made in 2021 required minor repairs at $155 per unit.
• 30 video recorders from sales made in 2021 required major repairs at $710 per unit.

Required:

Note: Show all workings: If you get the wrong answer without workings, it is very difficult to get any marks for your attempt. Therefore, it is extremely important to show all working so that marks can be allocated for incorrect answers.

1. How is a provision defined in AASB 137 Provisions, Contingent Liabilities and Contingent Assets?
2. What, according to AASB 137 Provisions, Contingent Liabilities and Contingent Assets, are the criteria that must be satisfied before an entity can recognize a provision? Given this criterion, explain why or why not Redfern Limited would recognize a provision as at 30 June 2021 in relation to:

• The 3,200 video recorders sold during the year ended 30 June 2021, and
• The 800 video recorders held in inventory as at 30 June 2021.

3. Show the general journal entries to establish the Provision for Warranty as at 30 June 2020 and 2021.
4. Show the general journal entries to record the actual warranty costs incurred during the years ended 30 June 2020 and 2021.
5. Show the final balance of the Provisions for Warranty account as at 30 June 2020 and 30 June 2021.