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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Dalton Co sells goods with a warranty. Past experience suggests that of 1,000 units sold in the year, 80% will need no repair, 15% will need minor repairs costing $20 each and 5% will need major repairs costing $100 each. What warranty provision should Dalton recognise at the year end?

The provision is $8,000. For a large population of similar warranty claims IAS 37 uses expected value: 150 units needing minor repairs at $20 gives $3,000, and 50 units needing major repairs at $100 gives $5,000, totalling $8,000.

  1. A$8,000
  2. B$5,000Correct
  3. C$3,000
  4. D$2,000

Explanation

For a large population of similar items, use expected values. Minor: 150 x $20 = $3,000. Major: 50 x $100 = $5,000. Total is $8,000, so the correct figure is $8,000, not the other options.

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