MESA gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale MESA undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the basis of experience, it is probable (i.e. more likely than not) that there will be some claims under the warranties. At 31 December 2021, MESA appropriately recognized P50,000 warranty provision. MESA incurred and charged P140,000 against the warranty provision in 2022. P80,000 of this related to warranties for sales made in 2022. The increase during 2022 in the discounted amount recognized as a provision at 31 December 2022 arising from the passage of time is P3,000. At 31 December 2022, MESA, estimated that it would incur expenditures in 2023 to meet its warranty obligations at 31 December 2022, as follows: 5 per cent probability of P400,000 20 per cent probability of P200,000 50 per cent probability of P20,000 25 per cent probability of P80,000 Assume for simplicity that the 2023 cash flows for warranty repairs and replacements take place, on average, on 30 June 2023. An appropriate discount rate is 10 per cent per year. An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6 percent to the probability-weighted expected cash flows. Discount factor at 5% for 6 months and 1 year is 0.95238 and 0.94340, respectively.What is the warranty expense recognized during 2022?
MESA gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale MESA undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. On the basis of experience, it is probable (i.e. more likely than not) that there will be some claims under the warranties.
At 31 December 2021, MESA appropriately recognized P50,000 warranty provision. MESA incurred and charged P140,000 against the warranty provision in 2022. P80,000 of this related to warranties for sales made in 2022. The increase during 2022 in the discounted amount recognized as a provision at 31 December 2022 arising from the passage of time is P3,000.
At 31 December 2022, MESA, estimated that it would incur expenditures in 2023 to meet its warranty obligations at 31 December 2022, as follows:
- 5 per cent probability of P400,000
- 20 per cent probability of P200,000
- 50 per cent probability of P20,000
- 25 per cent probability of P80,000
Assume for simplicity that the 2023
An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6 percent to the probability-weighted expected cash flows. Discount factor at 5% for 6 months and 1 year is 0.95238 and 0.94340, respectively.
What is the warranty expense recognized during 2022?
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