Reference no: EM133098883

Question - Icing Ltd sells freezers and provides a one-year warranty against faults occurring after sale. It estimates that if all goods with an outstanding warranty at its statement of financial position date of 31 December 2018 need minor repair the cost would be £4 million. If all the goods under warranty needed major repairs the total cost would be £ 14 million. At 31 December 2019 these amount have risen to £4.5 and £15 million respectively.

Based on previous years' behaviour, Icing Ltd estimates that 83% of the products will require no repairs, 15% will require minor repairs and 2% will require major repairs.

During the year ended 31 December 2019 actual costs of repairs under the warranty amounted to £ 520,000.

Required -

a. Explain the accounting treatment of the warranty in Icing Ltd's statements for the year ended 31 December 2019.

b. Explain if the following situation requires a provision to be created: "Johnson Ltd makes refunds to customers for any goods returned within 30 days of sale and has done so for many years, even though it has no legal obligation to do so."