Question
Meridian Appliances sells goods with a one-year warranty and recognises a warranty provision (IAS 37).
| Date | Event |
|---|
| During 2025 | Sold goods for cash totalling $500,000. |
| December 31, 2025 | Estimated warranty costs at 3% of sales and recognised the provision. |
| During 2025 | Paid $9,000 cash for actual warranty repairs. |
Required: Prepare the entries for the cash sales, the year-end warranty provision (3% × $500,000), and the actual warranty repairs paid in cash. Use a Warranty Provision liability and a Warranty Expense.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 1 — accrual basis of accounting
Revenue is recognised when earned and expense when incurred, independent of cash movement. For each item ask which period the economic event belongs to, then let the balance sheet carry the difference as a receivable, payable, prepayment or unearned amount.
Common mistakes
- Recognising revenue on receipt of cash in advance rather than as a liability until earned.
- Expensing a payment that covers more than the current period without splitting off the prepaid portion.
- Leaving incurred but unbilled expenses unrecorded because no invoice has arrived.
Further readingThe 5 types of adjusting entry