What amount should be reported as warranty liability as of December 31, 2019?
Company gives warranties at the time of sale to purchasers of its product. The entity undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. Sales of P5,000,000 were made evenly throughout 2019. The expenditures for warranty repairs and replacements for the product sold in 2019 are expected to be made 50% in 2019 and 50% in 2020. The 2020 outflows of economic benefits related to the warranty will take place on December 31, 2020.
The entity estimated that 75% of products sold require no warranty repairs, 15% of products sold require minor repairs costing P100,000 and 10% of products sold require major repairs costing P400,000. An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6% to the probability weighted expected cash flows. The appropriate discount factor for cash flows expected to occur on December 31, 2020 is 0.94. What amount should be reported as warranty liability as of December 31, 2019?
A.P250,000
B.P235,000
C.P249,100
D.P265,000
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