Reference no: EM133000134

Botches Watches Ltd offers a 12 month guarantee with the watches that it sells. On 1 July 2013, the balance of the Warranty Provision account was $1,200 Cr. During the year ended 30 June, warranty claims cost $1,500, of which $500 was for parts and $1,000 was for labour owing at year end.

During the same year, revenue from the sale of watches totalled $14,000, an increase of more than 10% on the previous year. Management estimated that the liability for unexpired warranty contracts at 30 June was $1,200. There have been no changes in suppliers, product quality or prices.

Required:

Problem a) Prepare the general journal entries to record the warranty claims during the year and the balance day adjustment to the Warranty Provision account.

Problem b) A trainee manager has raised concerns on the appropriateness of the warranty provision at 30 June 2014. Briefly discuss whether you think the balance in the warranty provision is adequate and provide support for your answer.