A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract of sale, the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the basis of experience, it is probable (i.e., more likely than not) that there will be some claims under the warranties. Sales of ₱40 million were made evenly throughout 20X1. Midterm Examination At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the 20x2 outflows of economic benefits related to the warranty repairs and replacements take place on June 30, 20x2. Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs or replacement costing 90% of sale price. The entity has no reason to believe future warranty claims will be different from its experience. At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30, 20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash flows. How much is the warranty provision at December 31, 20x1? a. 424,000 b. 840,000 c. 800,000 d. 752,000
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms
of the contract of sale, the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within one year from the date of sale. On the basis
of experience, it is probable (i.e., more likely than not) that there will be some claims under the
warranties.
Sales of ₱40 million were made evenly throughout 20X1.
Midterm Examination
At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold
in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the
20x2 outflows of economic benefits related to the warranty repairs and replacements take place on
June 30, 20x2.
Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold
require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs or
replacement costing 90% of sale price. The entity has no reason to believe future warranty claims
will be different from its experience.
At December 31, 20x1, the appropriate discount factor for
20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in the
cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash flows.
How much is the warranty provision at December 31, 20x1?
a. 424,000 b. 840,000 c. 800,000 d. 752,000
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