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

Sundaram Textiles Ltd. sold goods during 2025-26 under a warranty to repair defects arising within 12 months of sale. Past experience shows that 5% of goods sold will need minor repairs and 1% will need major repairs. Goods sold during the year were worth Rs. 80,00,000. Minor repairs cost 10% of sale value and major repairs cost 30% of sale value. What provision for warranty should be made at the year-end?

The provision is Rs. 64,000. For many similar warranty obligations AS 29 requires expected value weighting of outcomes: minor repairs 0.5% of sales (Rs. 40,000) plus major repairs 0.3% of sales (Rs. 24,000), totalling Rs. 64,000.

  1. ARs. 64,000
  2. BRs. 1,20,000
  3. CRs. 2,24,000Correct
  4. DRs. 3,20,000

Explanation

Under AS 29, for a large population of similar items the provision uses expected value. Minor: 5% x 10% x 80,00,000 = 40,000. Major: 1% x 30% x 80,00,000 = 24,000. Total = 64,000. Wait: check again, 5% x 10% = 0.5%, giving 40,000; 1% x 30% = 0.3%, giving 24,000; sum 64,000. The correct option is therefore Rs. 64,000.

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