A car dealership also owns a workshop that it uses for servicing cars under warranty. In preparing its financial statements, the car dealership needs to ascertain the provision of warranty that it would be required to provide at year-end. The entity’s past experience with warranty claims is: 60% of cars sold in a year have zero defects; 25% of cars sold in a year have normal defects; and 15% of cars sold in a year have significant defects. The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant defect” in a car is P30,000. The entity sold 1,000cars during the year. 1.Compute the amount of provision for warranty needed at year-end.
A car dealership also owns a workshop that it uses for servicing cars under warranty. In preparing its financial statements, the car dealership needs to ascertain the provision of warranty that it would be required to provide at year-end. The entity’s past experience with warranty claims is: 60% of cars sold in a year have zero defects; 25% of cars sold in a year have normal defects; and 15% of cars sold in a year have significant defects. The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant defect” in a car is P30,000. The entity sold 1,000cars during the year. 1.Compute the amount of provision for warranty needed at year-end.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A car dealership also owns a workshop that it uses for servicing cars under warranty. In preparing its financial statements, the car dealership needs to ascertain the provision of warranty that it would be required to provide at year-end. The entity’s past experience with warranty claims is: 60% of cars sold in a year have zero defects; 25% of cars sold in a year have normal defects; and 15% of cars sold in a year have significant defects. The cost of rectifying a “normal defect” in a car is P10,000. The cost of rectifying a “significant defect” in a car is P30,000. The entity sold 1,000cars during the year.
1.Compute the amount of provision for warranty needed at year-end.
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