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

Sundaram Textiles Ltd. sold goods in March 2025 with a one-year warranty. On 31 March 2025 the company estimates, from past experience, that 4% of the goods sold worth Rs 50,00,000 will need repairs costing on average 50% of the sale value of the goods repaired. What provision for warranty should be made at 31 March 2025 as per AS 29 (Revised)?

The provision is Rs 1,00,000. The sale creates a present obligation under warranty, and an outflow is probable. Expected repairs are 4% of Rs 50,00,000, which is Rs 2,00,000 of goods, and repair cost is 50% of that value, giving Rs 1,00,000.

  1. ARs 1,00,000Correct
  2. BRs 2,00,000
  3. CRs 25,000
  4. DRs 50,000

Explanation

Goods expected to need repair = 4% of Rs 50,00,000 = Rs 2,00,000. Repair cost = 50% of Rs 2,00,000 = Rs 1,00,000. This is a present obligation from a past event (sale) with probable outflow, so a provision of Rs 1,00,000 is made. Rs 2,00,000 ignores that repair cost is only half the sale value.

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