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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Dhruv Engineers Ltd. sells machines with a one-year warranty. Past experience: 70% of machines sold will have no defects, 20% will need minor repairs costing Rs 10,000 each, and 10% will need major repairs costing Rs 40,000 each. During the year 500 machines were sold. What is the warranty provision at year-end?

The provision is Rs 30,00,000. For a large population of similar items, expected value is used: 20% x Rs 10,000 plus 10% x Rs 40,000 gives Rs 6,000 per machine, and multiplied by 500 machines it equals Rs 30,00,000.

  1. ARs 30,00,000Correct
  2. BRs 3,00,000
  3. CRs 20,00,000
  4. DRs 15,00,000

Explanation

Expected cost per machine = 0.20 x 10,000 + 0.10 x 40,000 = 2,000 + 4,000 = Rs 6,000. For 500 machines = Rs 30,00,000 (check: 100 x 10,000 = 10,00,000 plus 50 x 40,000 = 20,00,000). Rs 20,00,000 counts only major repairs.

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