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ACCA Applied Skills · Financial Reporting · Provisions and events after the reporting period

At 31 December 20X5 Delta Co has sold 2,000 units of a product under warranty. Past experience shows 80% of units will have no defects, 15% will have minor defects costing $10 each to repair, and 5% will have major defects costing $40 each to repair. What provision should Delta recognise for warranty claims?

The provision is $7,000, using expected values for a large population of warranty items. Minor repairs cost 300 units at $10, giving $3,000, and major repairs cost 100 units at $40, giving $4,000, totalling $7,000.

  1. A$7,000Correct
  2. B$7,500
  3. C$3,500
  4. D$80,000

Explanation

For a large population of items, IAS 37 uses expected values. Minor: 2,000 x 15% x $10 = $3,000. Major: 2,000 x 5% x $40 = $4,000. Total = $7,000. $3,500 would wrongly halve the total, and $80,000 applies the major cost to all units.

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