(a) A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the manufacturer undertakes to make good by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On past experience, it is probable that there will be some claims under the warranties. Past experience suggests that 75% of the goods sold will have no defects, 20% will have minor defects and 5% will have major defects. If minor defects were detected in all products sold, the cost of repairs would be $1,000,000; if major defects were detected in all products sold, the cost would be $4,000,000. Requirements: Do you think a provision should be recognized? Explain your decision
(a) A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the manufacturer undertakes to make good by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On past experience, it is probable that there will be some claims under the warranties. Past experience suggests that 75% of the goods sold will have no defects, 20% will have minor defects and 5% will have major defects. If minor defects were detected in all products sold, the cost of repairs would be $1,000,000; if major defects were detected in all products sold, the cost would be $4,000,000. Requirements: Do you think a provision should be recognized? Explain your decision
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
(a) A manufacturer gives warranties at the time of sale to purchasers of its product.
Under the terms of the contract for sale, the manufacturer undertakes to make good
by repair or replacement, manufacturing defects that become apparent within three
years from the date of sale. On past experience, it is probable that there will be
some claims under the warranties.
Past experience suggests that 75% of the goods sold will have no defects, 20% will
have minor defects and 5% will have major defects. If minor defects were detected
in all products sold, the cost of repairs would be $1,000,000; if major defects were
detected in all products sold, the cost would be $4,000,000.
Requirements:
- Do you think a provision should be recognized? Explain your decision
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