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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. Past experience shows that of the goods sold in the year, 80% will have no defects, 15% will have minor defects costing Rs 2,000 per unit to repair, and 5% will have major defects costing Rs 10,000 per unit. During the year it sold 4,000 units. What is the warranty provision to be made at year-end, using the expected value method?

Not determinable from the options.

  1. ARs 12,40,000Correct
  2. BRs 9,60,000
  3. CRs 8,00,000
  4. DRs 16,00,000

Explanation

Expected cost per unit = 15% x 2,000 + 5% x 10,000 = 300 + 500 = Rs 800. For 4,000 units: 4,000 x 800 = Rs 32,00,000. Recheck: minor 600 units x 2,000 = 12,00,000; major 200 units x 10,000 = 20,00,000; total 32,00,000. Hence the stated key must be reconsidered: none of the options equals this, so the intended computation is flawed.

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