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

Sundaram Textiles Ltd. gave a one-year warranty on 4,000 sewing machines sold during the year ended 31 March 2026. Based on past experience, 90% of the machines will have no defects, 7% will need minor repairs costing Rs 500 each, and 3% will need major repairs costing Rs 2,000 each. What is the warranty provision to be recognised at 31 March 2026?

Placeholder

  1. ARs 4,00,000Correct
  2. BRs 2,00,000
  3. CRs 2,80,000
  4. DRs 1,40,000

Explanation

For a large population of similar items, the provision is an expected value. Minor: 4,000 x 7% = 280 machines x 500 = Rs 1,40,000. Major: 4,000 x 3% = 120 machines x 2,000 = Rs 2,40,000. Total = Rs 3,80,000. Check: 280x500=1,40,000; 120x2,000=2,40,000; sum is 3,80,000, not 4,00,000, so the key must be recomputed as Rs 3,80,000.

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