As a qualified Accountant working in an Accounting firm, you received a few queries related to Drek Limited, a company that sells electric appliances. Drek Limited has a financial year ending 30 September. One of these queries is listed below: Query Drek Limited started manufacturing and selling smart Television sets on 1 September 2020. The accountant of Drek Limited, Miss Renaise, is unsure how to account for the warranties, returns and exchanges related to these TV sets. Miss Renaise mentioned that 50 units were sold at N$50 000 each (cost price: N$32 500) during the financial year ended 30 September 2020. Drek Limited allows customers to return assets within 30 days after purchase for a full refund. This refund does not relate to the return of defective TV sets, but rather to instances where a client would change his mind about the purchase of the TV set and return the television for a full refund. The client is responsible for any transport costs related to the return. Although no TV sets were returned for a full refund during the current year, it is expected that 4 TV sets related to sales for the year ended 30 September 2020 will be returned during October 2020 under these terms and conditions. Drek Limited must, in terms of legislation, also allow customers to return defective TV sets for new functioning TV sets during a three (3) month warranty period. Customers do not have the option to purchase this warranty separately. Although no TV sets have been returned for new TV sets due to factory defaults, it is expected that two (2) TV sets related to sales for the year ended 30 September 2020 will be returned during the first two months of the next financial year. It is expected that costs of N$10 000 will be incurred in total to correct any defects related to these TV sets. It is also expected that Drek Limited will incur transportation costs of N$2 500 in total related to the returned TV sets. During the financial year ended 30 September 2020, 2 clients exchanged their TV sets for the exact same TV set, but of a different colour. It is expected that 3 more TV sets related to sales for the year ended 30 September 2020 will be exchanged, during October to December 2020, for the same TV set, but of a different colour. 

Required: 

Write an e-mail to Miss Renaise in which you, in terms of the appendix to IFRS 15, discuss the appropriate accounting treatment for the warranties, returns and exchanges related to the sales for the year ended 30 September 2020.

Answer rating: 100% (QA)

Email Subject Treatment of Warranties Returns and Exchanges Hi Miss Renaise Greetings of the day I am writing this email to you to dicuss about the tr... View the full answer