You are a CPA working for an accounting firm called AccPlus. One of your clients is Cairns Ltd James Manning is the Managing Director of Cairns Ltd He often contacts you for accounting issues, which he cannot understand. Currently he has expressed some concerns over a couple of accounting issues as shown in the memo below and he is seeking for your professional advice.

Cairns Ltd gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the company undertakes to remedy, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. As this is the first year that the warranty has been available to Product X there is no data from the firm to indicate whether there will be claims under the warranties. However, industry research suggests that it is likely that such claims will be forthcoming. Should a provision be recognized in accordance with accounting standards?

Answer rating: 100% (QA)

Yes according to accounting standards Cairns Ltd should recognize a provision for warranties if it ... View the full answer