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Ricecooker Ltd. offers a 12-month warranty to its customers with the rice cookers that it sells. Warranty liabilities are estimated at 10% of sales for
Ricecooker Ltd. offers a 12-month warranty to its customers with the rice cookers that it sells. Warranty liabilities are estimated at 10% of sales for the previous 12 months. On July 1, 2019, the balance of the Warranty Provision account was $48,000 (normal balance) During the year ended June 30, 2020, warranty expense is $50,000. Revenue from the sale of rice cookers in the current financial year is $450,000. There have been no changes in suppliers, product quality or prices. Required: (i) Construct the 'Warranty Provision' account. (6 marks) (ii) Below is the claim history of Ricecooker Ltd for the past two years: Warranty Claims Financial Year 2018 48,000 Financial Year 2019 50,000 Revenue of previous 12 months 400,000 420,000 Do you think the warranty provisions made are adequate to cover warranty claims for years from 2018 to 2020? Give reason for your answer. Show your working. What is the recommendation you would suggest to the management of Ricecooker Ltd on their warranty policy
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