Risk Activities

Decker Corporation Limited, a leading manufacturer of power tools, sells a “multi tool” power tool with several adapters for $450 per unit.  During the year ending 30 June 2017, Decker Corporation sold 100,000 units of this “multi tool” power tool.

Decker Corporation has information based on product testing and historical experience that identifies 1% of the power tools may require warranty service costing an average of $50 within the 12-month warranty period.  A further 1.5% of power tools may require warranty replacement costing $200.  

On 1^st August 2017, a customer was given a warranty replacement tool at a cost price of $200 to Decker Corporation Limited as they were unable to repair the tool.

Required:

Discuss the purpose of establishing a provision for warranty account for an entity. Refer to the conceptual framework and generally accepted accounting principles to support your answer.   (5 marks)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              &