Task 1 (30 marks)
Luxwood operates a customer loyalty programme as follows:
Under a LuxRewards Card™ system, each year, on the anniversary of the issue of each customer’s card, the store grants a non-refundable credit to each customer’s account according to a sliding scale based on aggregate purchases for the previous 12 months period. The credit is 2% up to $5,000, 3% for the next $5,000 and 4% thereafter. There is no limit. The credit may only be used to reduce the amount payable for LuxRewards Card™ credit purchases.
For example: Customer A commenced his credit card account a few years ago on 1 February so he is entitled to a credit on the anniversary of that date each year, based on his actual purchases for the previous 12 months. Therefore, at balance date, 30 June, an accrual is made based on the actual sales since 1 February although the actual credit cannot be accurately calculated and neither will it arise until the following financial year.
At 30 June 2020 Luxwood estimates that for the period up to that date its liability in respect of these credits is $220,000. In addition, it has already credited $245,000 during the year ended 30/6/20. The store estimates that, on average, 10% of these credits will lapse.
Task 2 (30 marks)
Luxwood prides itself on its “no questions asked” refund policy for return of defective goods. It has gathered statistics over the previous 8 years since it adopted this policy and it concludes, as a reliable estimate, that of all its refunds under this policy, 60% are covered by supplier warranties. It bears the balance as a cost of doing business. In this respect the store has made the following entry in its journal for the year ended 30 June 2020: Dr. Profit and Loss 25,000 Cr. Provision for warranties 25,000 Narration: Being 40% of estimated refunds for claims in respect of defective goods sold during the year ended 30 June2020 for which no supplier warranty is available.
Task 3 (20 marks)
During the year it came to the directors’ attention that a rival firm was marketing a lounge suite that appeared identical to Luxwood’s best-selling line. An action to recover damages was commenced. The matter is yet to be finalised but the company’s legal advisors are confident. At June 30 only $1,500 had been paid in legal fees but estimated additional costs of $24,000 had accrued although no account had been received.
Task 4 (20 marks)
In November 2019 a visitor to Luxwood showroom slipped on the steps and sustained injuries requiring medical attention. She claims one of the steps was loose and commenced legal proceedings against Luxwood alleging her injuries were caused by the poor condition of the building. Luxwood has so far incurred legal expenses of $4,000 and the action has not been settled at 30 June.