Skip to content

ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Kobe Co sold 10,000 units in the year, each with a 12-month warranty. Past experience shows 90% of units will need no repair, 8% will need minor repair costing $20 each, and 2% will need major repair costing $100 each. What warranty provision should be recognised?

The provision is $36,000, using expected values for a large population of similar items. Minor repairs cost 8% x $20 = $1.60 per unit and major repairs 2% x $100 = $2.00 per unit, totalling $3.60 per unit, multiplied by 10,000 units.

  1. A$36,000Correct
  2. B$16,000
  3. C$20,000
  4. D$360,000

Explanation

Expected value: 8% x $20 = $1.60; 2% x $100 = $2.00; total $3.60 per unit. Across 10,000 units this is $36,000. $16,000 is minor repairs only; $20,000 is major repairs only.

Did you get it right without looking?

One question tells you little. A timed set on Provisions and contingencies shows your real accuracy, how long you take and where you lose marks.

Practise Provisions and contingenciesFree diagnostic mock

More Provisions and contingencies questions