Skip to content

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

Shree Textiles Ltd. sold goods in March 2026 under a warranty to repair defects arising within one year. Past experience shows that 90% of goods will have no defects, 6% will have minor defects costing Rs 20,00,000 in total to repair if all goods sold had minor defects, and 4% will have major defects costing Rs 80,00,000 in total to repair if all goods sold had major defects. Using the expected value approach, what amount should be provided for warranty at 31 March 2026?

The warranty provision is Rs 4,40,000. For a large population of items, AS 29 uses the expected value: weight each outcome by its probability, so 6% of Rs 20,00,000 plus 4% of Rs 80,00,000 gives Rs 1,20,000 plus Rs 3,20,000, totalling Rs 4,40,000.

  1. ARs 1,00,00,000
  2. BRs 4,40,000Correct
  3. CRs 3,20,000
  4. DRs 1,20,000

Explanation

Expected value = 6% x 20,00,000 + 4% x 80,00,000 = 1,20,000 + 3,20,000 = Rs 4,40,000. Adding the two full costs gives Rs 1,00,00,000, which ignores probabilities. Taking only the major-defect weight gives Rs 3,20,000, and only the minor weight gives Rs 1,20,000, both omitting one class of defects.

Did you get it right without looking?

One question tells you little. A timed set on AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets shows your real accuracy, how long you take and where you lose marks.

Practise AS 29 (Revised) Provisions, Contingent Liabilities and Contingent AssetsFree diagnostic mock

More AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets questions