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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 for one year. Past experience shows that 90% of goods sold have no defects, 6% have minor defects costing Rs 40 lakh in total repair if all goods sold had minor defects, and 4% have major defects costing Rs 200 lakh in total repair if all goods sold had major defects. What provision should be recognised at the year-end under AS 29?

The provision is Rs 10.40 lakh. Where a warranty obligation relates to a large population of similar items, AS 29 requires measurement by expected value, weighting each outcome by its probability: 6% of 40 lakh plus 4% of 200 lakh gives 2.40 plus 8.00 lakh.

  1. ARs 10.40 lakhCorrect
  2. BRs 2.40 lakh
  3. CRs 8.00 lakh
  4. DRs 240 lakh

Explanation

For a large population of similar items, the obligation is measured by expected value. Expected cost = 6% x 40 + 4% x 200 = 2.40 + 8.00 = Rs 10.40 lakh. Rs 8.00 lakh ignores the minor defects, and Rs 2.40 lakh ignores the major defects.

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