Reference no: EM132525124

Point 1: Euro Classics Ltd has been operating a successful business for many years specialising in servicing and reconditioning repairs for classic European automobiles. Servicing costs $750, while reconditioning engines costs $1450. The business has a reputation for good customer service, an important feature of which is the 12 months parts and labour written warranty provided with each service. On 30 June 2019, the owners decided to introduce the practice of providing for warranty expenses at year-end, thereby establishing a warranty expense in the year the vehicles are serviced or reconditioned, and setting up a provision to cover future warranty expenses as they occur. Past records have been examined, and it has been established that, on average, one in twenty vehicles are subject to a claim under the warranty offered.

Point 2: The costs of warranty have amounted to $400 for serviced vehicles and $960 for reconditioned vehicles. During the year ended 30 June 2019, 500 vehicles were serviced and 260 engines were reconditioned. During the year ended 30 June 2020, 22 serviced vehicles and 15 reconditioned engines were repaired under the warranty. The costs of warranty work carried out by Euro Classics were all paid in cash. During the year, 680 vehicles were serviced and 240 engines were reconditioned. At 30 June 2020, it was decided that warranty costs in the following year would increase by 5%. (Ignore GST.)

Question (a) Make the general journal entries to record the services/reconditioning for the year, and to establish the Provision for Warranty at 30 June 2019.

Question (b) Make the general journal entries to record sales and the actual warranty costs incurred during the year ended 30 June 2020.