CA Inter P1 · Chapter 4 · Question 5 of 8
Case: Vayu Appliances Ltd sells products with a one-year warranty. If all products sold during the year had minor defects, repair costs would be ₹5,00,000; if all had major defects, costs would be ₹20,00,000. Past experience shows 70% of goods have no defects, 20% minor defects and 10% major defects. The warranty provision under AS 29 is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) ₹3,00,000
Explanation
For a large population of items, the best estimate of the obligation is the expected value obtained by weighting outcomes by their probabilities. Provision = 70% x 0 + 20% x 5,00,000 + 10% x 20,00,000 = 1,00,000 + 2,00,000 = ₹3,00,000.
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