ACCA FR · Chapter 8 · Question 7 of 10
Dipper Co sold 10,000 products under a one-year warranty during the year. Past experience shows 80% will need no repairs, 15% will need minor repairs costing $50 each and 5% will need major repairs costing $400 each. No claims have yet been made. What warranty provision should be recognised?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $275,000
Explanation
For a large population of items, IAS 37 uses the expected value. Expected cost per unit = (15% x $50) + (5% x $400) = $7.50 + $20.00 = $27.50. Provision = 10,000 x $27.50 = $275,000.
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