Provision and Replacement of Goods Under Warranty: Ensuring Customer Satisfaction

How does Electro Ltd manage its warranty expenses and replacement of goods under warranty?

1. What is the provision for warranty expenses recorded by Electro Ltd at the end of the financial year?

2. How does Electro Ltd handle the replacement of goods under warranty?

3. Is there any adjusting entry necessary for Electro Ltd's provision for unexpired warranty contracts?

Answers:

1. Provision of Warranty: Electro Ltd should record a provision for warranty expense of $200,000 at 30 June 2012 based on its estimate of servicing outstanding warranties.

2. Replacement of Goods Under Warranty: Electro incurred a cost of $10,000 on 12 July 2012 for replacing goods under warranty, using inventory.

3. Adjusting Entry for Unexpired Warranty: At 30 June 2013, Electro should adjust the provision to $240,000 to account for estimated servicing costs of unexpired warranty contracts.

Explanation:

Electro Ltd, a company that sells electronic equipment, takes customer satisfaction seriously by managing its warranty expenses and replacement of goods under warranty effectively. The company follows a structured approach to ensure that customers receive quality service and support even after the purchase.

Provision of Warranty:

At the end of the financial year, specifically on 30 June 2012, Electro Ltd records a provision for warranty expenses. This provision amounts to $200,000 and is based on the company's estimate of servicing outstanding warranties. By recognizing this provision, Electro Ltd acknowledges its obligation to cover potential future warranty claims. The $200,000 provision reflects past experience related to the percentage of sales resulting in warranty claims and the average cost of servicing such claims. This proactive approach allows Electro Ltd to account for its warranty obligations accurately in its financial statements.

Replacement of Goods Under Warranty:

In July 2012, Electro Ltd incurs a specific cost of $10,000 for replacing goods under warranty. The company uses goods from its own inventory for this purpose, ensuring that customers receive timely replacements for faulty products. This direct cost associated with honoring warranty claims showcases Electro Ltd's commitment to providing reliable after-sales support to its customers.

Adjusting Entry for Unexpired Warranty:

As the next balance date approaches on 30 June 2013, Electro Ltd reevaluates its provision for warranty expenses. The company estimates that the cost of servicing unexpired warranty contracts will amount to $240,000. To align its financial statements with this updated estimation, Electro Ltd needs to adjust the provision accordingly. By increasing the provision to $240,000, Electro Ltd ensures that its accounts accurately reflect the expected servicing costs for unexpired warranty contracts. This adjustment demonstrates the company's diligence in managing its warranty obligations and maintaining transparency in its financial reporting.