Question 2 (9 marks)

From 1 July 2015, Cotchin Ltd developed and began selling a new product, the iFeel tablet which was capable of responding to human emotions. The company had previously sold computer monitors and was excited by the prospect of branching out into a new and very innovative product line. The company offers customers an extended warranty period of 3 years on the iFeel tablet. At 30 June 2016, management has estimated that two percent of products would be returned for repair at an estimated annual cost of $650,000 per annum based on predicted annual sales volumes.

Required:

Using the relevant definitions and recognition criteria found in the AASB Framework for the Preparation and Presentation of Financial Statements, justify whether the company should account for the extended warranty as a liability.