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

Kaveri Textiles Ltd. sold goods in March 2026 with a warranty to repair defects for one year. Past experience shows that 90% of goods sold will have no defects, 6% will have minor defects costing Rs 40,000 in total if all goods sold were of this type, and 4% will have major defects costing Rs 2,00,000 in total if all goods sold were of this type. Following AS 29 on the expected value approach for a large population of similar items, what provision should be made at 31 March 2026?

The provision is Rs 10,400. For a large population of similar warranty items AS 29 requires the expected value method, weighting each outcome by its probability: 6% of 40,000 gives 2,400 and 4% of 2,00,000 gives 8,000, which together total 10,400.

  1. ARs 10,400Correct
  2. BRs 2,40,000
  3. CRs 8,000
  4. DRs 2,400

Explanation

For a large population of similar items, the obligation is estimated by weighting all outcomes by probability. Minor: 6% x 40,000 = 2,400. Major: 4% x 2,00,000 = 8,000. Total = 10,400. Rs 8,000 ignores the minor defects; Rs 2,40,000 simply adds the full amounts without weighting.

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