Humanizer Company gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the entity undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On December 31, 2011, the entity appropriately recognized P50,000 warranty provision. The entity incurred and charged P140,000 against the warranty provision in 2012. Out of the P140,000, an amount of P80,000 related to warranties for sales made in 2012. The increase during 2012 in the discounted amount recognized as a provision on December 31, 2011 arising from the passage of time is P2,000. On December 31, 2012, the entity estimated that it would incur expenditures in 2013 to meet its warranty obligations on December31, 2012 as follows: 5% probability of P400,000; 20% probability of P200,000; 50% probability of P 80,000; 25% probability of P20,000. Assume for simplicity that the 2013 cash flows for warranty repairs and replacements take place on June 30, 2013. An appropriate discount rate is 10% per year. The PV of I at 10% for one year is 0.91 and the PV of 1 at 10% for 6 months is 0.95. An appropriate risk adjustment factor to reflect the uncertainties in the cashflow estimates is an increment of 8% to the probability-weighted expected cash flows. What is the warranty expense to be recognized in 2012? a. 107,730 b. 195,730 c. 187,730 d. 185,000

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable

Section: Chapter Questions

Problem 24E: Spath Company borrows 75,000 by issuing a 4-year, noninterest-bearing note to a customer on January...

See similar textbooks

Related questions

Question

Humanizer Company gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the entity undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On December 31, 2011, the entity appropriately recognized P50,000 warranty provision. The entity incurred and charged P140,000 against the warranty provision in 2012. Out of the P140,000, an amount of P80,000 related to warranties for sales made in 2012. The increase during 2012 in the discounted amount recognized as a provision on December 31, 2011 arising from the passage of time is P2,000. On December 31, 2012, the entity estimated that it would incur expenditures in 2013 to meet its warranty obligations on December31, 2012 as follows: 5% probability of P400,000; 20% probability of P200,000; 50% probability of P 80,000; 25% probability of P20,000. Assume for simplicity that the 2013 cash flows for warranty repairs and replacements take place on June 30, 2013. An appropriate discount rate is 10% per year. The PV of I at 10% for one year is 0.91 and the PV of 1 at 10% for 6 months is 0.95. An appropriate risk adjustment factor to reflect the uncertainties in the cashflow estimates is an increment of 8% to the probability-weighted expected cash flows. What is the warranty expense to be recognized in 2012?

a. 107,730

b. 195,730

c. 187,730

d. 185,000

Expert Solution

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.