14. Humanizer Company giveswarranties at the time of saleto purchasers of its product.Under the terms of the sale,the entity undertakes to makegood, by repair orreplacement, manufacturingdefects that become apparentwithin one year from the dateof sale. On December 31, 2011,the entity appropriatelyrecognized P50,000 warrantyprovision. The entity incurredand charged P140,000 againstthe warranty provision in 2012.Out of the P140,000, anamount of P80,000 related towarranties for sales made in2012. The increase during 2012in the discounted amountrecognized as a provision onDecember 31, 2011 arisingfrom the passage of time isP2,000. On December 31,2012, the entity estimated thatit would incur expenditures in2013 to meet its warrantyobligations on December31,2012 as follows: 5% probabilityof P400,000; 20% probabilityof P200,000; 50% probabilityof P 80,000; 25% probabilityof P20,000. Assume forsimplicity that the 2013 cashflows for warranty repairs andreplacements take place onJune 30, 2013. An appropriatediscount rate is 10% per year.The PV of I at 10% for one yearis 0.91 and the PV of 1 at 10%for 6 months is 0.95. Anappropriate risk adjustmentfactor to reflect theuncertainties in the cashflowestimates is an increment of8% to the probability-weighted expected cashflows. What is the warrantyexpense to be recognized in2012? *a. 107,730b. 195,730c. 187,730O d. 185,000

SOLUTION WARRANTY EXPENSE IS THE COST THAT THE BUSINESS EXPECT TO OR ALREADY INCURRED FOR THE REPAIR…

14. Humanizer Company gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the entity undertakes to make good, by repair or replacement, manufacturing defects that become apparen“ within one year from the date of sale. On December 31, 2011, the entity appropriately recognized P50,000 warranty provision. The entity incurred and charged P140,000 agains the warranty provision in 2012. Out of the P140,000, an amount of P80,000 related to warranties for sales made in 2012. The increase during 2012 in the discounted amount recognized as a provision on December 31, 2011 arising from the passage of time is P2,000. On December 31, 2012, the entity estimated tha it would incur expenditures in 2013 to meet its warranty obligations on December31, 2012 as follows: 5% probability of P400,000; 20% probability of P200,000; 50% probability of P 80,000; 25% probability

14. Humanizer Company gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the entity undertakes to make good, by repair or replacement, manufacturing defects that become apparen“ within one year from the date of sale. On December 31, 2011, the entity appropriately recognized P50,000 warranty provision. The entity incurred and charged P140,000 agains the warranty provision in 2012. Out of the P140,000, an amount of P80,000 related to warranties for sales made in 2012. The increase during 2012 in the discounted amount recognized as a provision on December 31, 2011 arising from the passage of time is P2,000. On December 31, 2012, the entity estimated tha it would incur expenditures in 2013 to meet its warranty obligations on December31, 2012 as follows: 5% probability of P400,000; 20% probability of P200,000; 50% probability of P 80,000; 25% probability

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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