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

Kaveri Auto Ltd. sells vehicles with a one-year warranty. In the year, it sold 1,000 units. Past experience shows 80% of units will have no defects, 15% will have minor defects costing Rs 4,000 per unit to repair, and 5% will have major defects costing Rs 20,000 per unit. What provision for warranty should be made at year-end?

The warranty provision is Rs 16,00,000. For a large population of items AS 29 uses expected value: minor defects 150 units at Rs 4,000 give Rs 6,00,000 and major defects 50 units at Rs 20,000 give Rs 10,00,000, which together total Rs 16,00,000.

  1. ARs 16,00,000Correct
  2. BRs 20,00,000
  3. CRs 10,00,000
  4. DRs 6,00,000

Explanation

Expected value method for a large population: minor = 1,000 x 15% x 4,000 = Rs 6,00,000. Major = 1,000 x 5% x 20,000 = Rs 10,00,000. Total = Rs 16,00,000. Rs 10,00,000 considers only major defects, and Rs 20,00,000 wrongly uses the single highest cost for 100 units.

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