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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 warranty to repair defects arising within 12 months. Past experience shows that 90% of goods will have no defects, 6% will have minor defects costing Rs 40 per unit to repair, and 4% will have major defects costing Rs 200 per unit. Sundaram sold 50,000 units. Under AS 29 (Revised), the provision for warranty at the year-end is:

The provision is the expected value of repair costs across the population of units sold. Minor defects cost Rs 1,20,000 and major defects cost Rs 4,00,000, so the warranty provision is Rs 5,20,000.

  1. ARs 5,50,000Correct
  2. BRs 2,00,000
  3. CRs 1,20,000
  4. DRs 4,40,000

Explanation

For a large population of similar items, the expected value is used. Minor: 50,000 x 6% x 40 = Rs 1,20,000. Major: 50,000 x 4% x 200 = Rs 4,00,000. Total = Rs 5,20,000. Check per unit: 0.06x40 + 0.04x200 = 2.4 + 8 = Rs 10.40; x 50,000 = Rs 5,20,000.

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