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

Kaveri Appliances Ltd. sells goods with a one-year warranty. Based on past experience, for the year ended 31 March 2026, sales were Rs 8,00,00,000. Expected outcomes: 80% of goods will have no defects, 15% will have minor defects costing 4% of sales value to repair, and 5% will have major defects costing 10% of sales value to repair. What is the warranty provision to be recognised, using the expected value for this large population of items?

The provision is Rs 8,80,000. For a large population of similar items, the expected value method weights each outcome by its probability: 15% x 4% plus 5% x 10% equals 1.1% of sales, and 1.1% of Rs 8 crore is Rs 8,80,000.

  1. ARs 8,80,000
  2. BRs 9,60,000Correct
  3. CRs 12,00,000
  4. DRs 40,00,000

Explanation

Expected value = 15% x 4% + 5% x 10% = 0.6% + 0.5% = 1.1% of sales. 1.1% of Rs 8,00,00,000 = Rs 8,80,000. Hence the correct figure is Rs 8,80,000. Rs 9,60,000 would come from using only the minor defect part wrongly (15% x 8 crore x 4% = 4.8 lakh) plus an unsupported figure; this is not the expected value.

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