The board decided that we would introduce a one-year warranty program relating to guarantees on the timeliness of our deliveries. We dont bill any extra for this the warranty is embedded in our regular prices. We started this program on January 1, 20X3 and I thought that the total cost of this would be around 1% of sales. Since that time but we have only paid out $180,000 in claims. However, I still feel my original estimate is appropriate.

EXHIBITI STATEMENT OF INCOME YEAR ENDED AUGUST 31 20X3 Draft 20X2 Audited Sales Cost of goods sold Gross profit $ 34,800,000 21.600.000 13,200,000 $ 25,600,000 16,000,000 9,600,000 Expenses: Wages General and administrative Depreciation expense Pension expense Warranty expense 2,400,000 2,827,200 1,500,000 560,000 180.000 7.467,200 1,400,000 1,912,000 1,200,000 320,000 4.832.000 4,768,000 (32,000) Income from operations Interest on bank loan Interest on bonds Bond redemption expense Net income before income tax 5,732,800 (232,000) (144,000) (371.632) 4.985,168 4,736,000 1,440,000 Tax expense - current Tax expense - deferred 1,676,000 84.000 1.760,000 $_2.976.000 1.440,000 $_3.545.168 Net income EXHIBITI STATEMENT OF FINANCIAL POSITION AUGUST 31 Assets 20X3 Draft 20x2 Audited Current assets: Cash Accounts receivable Inventory 176,000 1.240,000 2.235.000 3,654,000 272.000 760.000 1.420,000 2,452.000 Leased equipment Property, plant and equipment Accumulated depreciation-plant and equipment 265,600 16,000,000 (4.200.000 12.065.600 $_15,719,600 8,000,000 (2.700.000 5.300.000 $_7.752.000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Income taxes payable $ 291,000 191,000 125.000 619,000 291.000 800.000 Noncurrent liabilities Bonds payable Bank loan Lease liability Pension liability Deferred income tax 4,515,032 800,000 232,400 250,000 357.000 6.478.432 280,000 357.000 2.056,000 Shareholders' equity Common shares Retained earnings 120,000 9.121.168 9.241.168 $_15.719,600 120,000 5,576,000 5,696,000 $_7.752.000 EXHIBITI STATEMENT OF INCOME YEAR ENDED AUGUST 31 20X3 Draft 20X2 Audited Sales Cost of goods sold Gross profit $ 34,800,000 21.600.000 13,200,000 $ 25,600,000 16,000,000 9,600,000 Expenses: Wages General and administrative Depreciation expense Pension expense Warranty expense 2,400,000 2,827,200 1,500,000 560,000 180.000 7.467,200 1,400,000 1,912,000 1,200,000 320,000 4.832.000 4,768,000 (32,000) Income from operations Interest on bank loan Interest on bonds Bond redemption expense Net income before income tax 5,732,800 (232,000) (144,000) (371.632) 4.985,168 4,736,000 1,440,000 Tax expense - current Tax expense - deferred 1,676,000 84.000 1.760,000 $_2.976.000 1.440,000 $_3.545.168 Net income EXHIBITI STATEMENT OF FINANCIAL POSITION AUGUST 31 Assets 20X3 Draft 20x2 Audited Current assets: Cash Accounts receivable Inventory 176,000 1.240,000 2.235.000 3,654,000 272.000 760.000 1.420,000 2,452.000 Leased equipment Property, plant and equipment Accumulated depreciation-plant and equipment 265,600 16,000,000 (4.200.000 12.065.600 $_15,719,600 8,000,000 (2.700.000 5.300.000 $_7.752.000 Liabilities and Shareholders' Equity Current liabilities: Accounts payable Income taxes payable $ 291,000 191,000 125.000 619,000 291.000 800.000 Noncurrent liabilities Bonds payable Bank loan Lease liability Pension liability Deferred income tax 4,515,032 800,000 232,400 250,000 357.000 6.478.432 280,000 357.000 2.056,000 Shareholders' equity Common shares Retained earnings 120,000 9.121.168 9.241.168 $_15.719,600 120,000 5,576,000 5,696,000 $_7.752.000