The Washing Machine Repair Company gives a warranty of no-cost rectification of unsatisfactory repairs. It has revenue from repair contracts recorded as:

Year ______________ Amount of revenue

........................................... £

1 .................................. 80,000

2 .................................. 90,000

Based on previous experience the manager makes a provision of 10% of revenue each year for warranty costs. In respect of the work done during Years 1 and 2, repairs under warranty are carried out as follows:

Required
(a) Show how this information would be recorded in the financial statements of the Washing Machine Repair Company.
(b) Explain how the financial statements would appear if the company made no provision for warranty costs but charged them to income statement (profit and loss account) when incurred?

Transcribed Image Text:

Date of repair work Amount in respect Amount in respect of Year 2 revenue Total of Year 1 revenue Year 4,500 4,500 3,200 4,800 8,000 2 5,000 5,000 3