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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

At 1 January, Penta Co had a warranty provision of $42,000. During the year, warranty repairs of $38,000 were paid in cash. At 31 December the required provision is $45,000. What is the warranty expense charged to profit or loss for the year?

The warranty expense is $41,000. The provision moves from $42,000 to $45,000 after $38,000 of repairs were charged against it, so the charge needed is 45,000 minus 42,000 plus 38,000. The $3,000 increase alone ignores the amount utilised.

  1. A$41,000Correct
  2. B$38,000
  3. C$45,000
  4. D$3,000

Explanation

Closing provision $45,000 = opening $42,000 + charge - utilised $38,000. Charge = 45,000 - 42,000 + 38,000 = $41,000. The cash paid is debited against the provision, not expensed again. $3,000 is only the net increase.

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