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a company has a policy of refunding the cost of any goods returned by dissatisfied customers. this is policy is a constructive obligation. at the year end, returns totaling $4800 have been made.
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the answer to this is that a provision must be made.
—————————————upon reading the question, i read ” … returns totaling $4800 have been made” as, to paraphrase “the company had paid out 4800 to dissatisfied customers”
and on that basis, i answered that since the money has been paid, nothing needs to be done.
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am i to understand that even the returns have been made by the customers, money has yet not been paid out??
regards
If you have typed out the full question, then it is worded very strangely!
With regard to the returns that have been made, then either they have already refunded the money or, even if they have not, it would appear as a current liability, not as a provision.
All I can think is that there is potential for there to be more returns of goods that were sold this year (they may, for example, have made sales in the last few weeks which the customer have not yet had the chance to return). If that is the case, then they would need a provision for those extra potential returns.
Hope that helps 🙂
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