Surfs SUP Ltd sell stand-up paddleboards. They pride themselves on offering quality products and offer a 3 year warranty on all of their paddleboards.

If minor defects occurred in all products sold, repair costs would be $2m. If major defects occurred, repair costs would be $6m. Based on the entitys past experience and future expectations, they estimate that 15% of boards will present with minor defects over the warranty period, and only 3% with major defects.

It is expected that one third of the warranty claims (major and minor) will happen at the end of the first year, another third at the end of the second year, and another third at the end of the third year. The pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability is 8%.

Surfs SUP Ltd ask for your advice as to whether they should establish a provision for their expected warranty claims, and what the appropriate accounting treatment would be.

please answer the questions based on Australia Accounting Standard Board (AASB).

1. ) Advise Surfs SUP Ltd (max. 250 words) on whether they need to create a warranty provision and why. Refer to the Accounting Standards in your answer. 10 marks

2. b) Calculate the amount of the warranty provision that you would advise Surfs Up Ltd to establish. Show all workings. 6 marks

3. c) Provide the appropriate journal entry for Surfs SUP Ltd to establish a provision for warranties at 30 June 2019. 2 marks

4. d) On 3 July 2019, Surfs SUP Ltd paid out $35,000 in warranty claims. Provide the appropriate journal entry. 2 marks