Discuss, with reference to ias 37

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Reference no: EM133433612

Star Tech Ltd

Star Tech Ltd sells graphics cards for gaming systems. All sales contracts grant customers a one-month guarantee on the purchased cards. All graphics cards are supplied to Star Tech by Rizen (Pty) Ltd. All returned graphics cards that are still under guarantee are sent to Rizen for repairs.

Rizen (Pty) Ltd invoices Star Tech Ltd for all the repair costs. Rizen investigates the reason for the repairs and reimburses Star Tech for all repair work that had to be done due to Rizen's lack of quality control. Repairs to graphics cards due to negligence on the part of the customer is not reimbursed. Star Tech Ltd trusts the integrity of Rizen (Pty) Ltd as they enjoy a six-year business relationship.

The following information of Star Tech Ltd for the reporting period ended 28 February 2023, is presented to you:

Cost of sold trade inventories still under guarantee at 1 March 2022

690 000

Cost of sold trade inventories still under guarantee at 28 February 2023

740 000

Invoices received from Rizen (Pty) Ltd for repairs on trade inventories under guarantee (net of reimbursements)

59 300

Reimbursements against invoices from Rizen (Pty) Ltd charged i.r.o. repairs to graphics cards under guarantee

6 500

Additional information:

Experience in the past showed that 50% of all sold trade inventories are returned to Star Tech Ltd in terms of the guarantee. The repair costs of these returned items are estimated at 20% of the original cost of sales.

The trend during the past four years showed that 10% of the returned graphics cards that are still under guarantee and that were sent to Rizen (Pty) Ltd were faulty due to defective quality control by Rizen (Pty) Ltd. The realisation of any reimbursement estimates is not virtually certain.

Discuss, with reference to IAS 37 "Provisions, contingent liabilities and contingent assets", whether a provision shall be recognised for trade inventories still under guarantee at the end of the reporting period in the financial statements of Star Tech Ltd for the reporting period ended 28 February 2023.

Reference no: EM133433612

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