5 The directors of Quapaw, a limited liability company, are reviewing the compan

5 The directors of Quapaw, a limited liability company, are reviewing the company’s draft financial statements for the

year ended 31 December 2004.

The following material matters are under discussion:

(a) During the year the company has begun selling a product with a one-year warranty under which manufacturing

defects are remedied without charge. Some claims have already arisen under the warranty. (2 marks)

Required:

Advise the directors on the correct treatment of these matters, stating the relevant accounting standard which

justifies your answer in each case.

NOTE: The mark allocation is shown against each of the three matters

(a) The correct treatment is to provide for the best estimate of the costs likely to be incurred under the warranty, as required byIAS37 Provisions, contingent liabilities and contingent assets.