X Ltd Sold 2000 Computers in June

question 31

Essay

X Ltd sold 2000 computers in June. The terms of sale included a 12-month warranty. The warranty provides that X Ltd will meet the cost of repairs that are associated with faulty parts attributable to manufacture. Past experience indicates that 10% of computer sales lead to warranty claims at an average cost of $70 for parts and $100 for labour, per computer.
Discuss whether the warranty commitment would meet the definition and recognition criteria of a liability to the firm at 30 June.

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Definitions:

Proportional

Characterized by a constant relationship in degree or number between two variables.

Average Tax Rate

The proportion of total income that is paid as tax, calculated by dividing the total amount of tax paid by the total income.

Personal Income

The total amount of income earned by individuals from all sources, including wages, dividends, and interest, before taxes.

Tax Incidence

The analysis of the effect of a particular tax on the distribution of economic welfare among stakeholders.