Electro Company gives warranties at the time of sale to purchasers of its product. The entity undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. Sales of P5,000,000 were made evenly throughout 2021. The expenditures for warranty repairs and replacements for the products sold in 2021 are expected to be made 50% in 2021 and 50% in 2022. The 2022 outflows of economic benefits related to the warranty will take place on December 31, 2022. The entity estimated that 75% of products sold require no warranty repairs, 15% of products sold require minor repairs costing P100,000 and 10% of products sold require major repairs costing P400,000. An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6% to the probability weighted expected cash flows. The appropriate discount factor for cash flows expected to occur on December 31, 2022 is 0.94. 1. What amount should be reported as warranty expense for 2021? a. 500,000 b. 498,200 c. 514,100 d. 530,000 2. What amount should be reported as warranty liability on December 31, 2021? a. 265,000 b. 249,100 c. 250,000 d. 235,000 105
Electro Company gives warranties at the time of sale to purchasers of its product. The entity undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. Sales of P5,000,000 were made evenly throughout 2021. The expenditures for warranty repairs and replacements for the products sold in 2021 are expected to be made 50% in 2021 and 50% in 2022. The 2022 outflows of economic benefits related to the warranty will take place on December 31, 2022. The entity estimated that 75% of products sold require no warranty repairs, 15% of products sold require minor repairs costing P100,000 and 10% of products sold require major repairs costing P400,000. An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6% to the probability weighted expected cash flows. The appropriate discount factor for cash flows expected to occur on December 31, 2022 is 0.94. 1. What amount should be reported as warranty expense for 2021? a. 500,000 b. 498,200 c. 514,100 d. 530,000 2. What amount should be reported as warranty liability on December 31, 2021? a. 265,000 b. 249,100 c. 250,000 d. 235,000 105
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
What is the correct answer in numbers 1 and 2? Show solution.
Transcribed Image Text:Electro Company gives warranties at the time of sale to
purchasers of its product. The entity undertakes to make
good, by repair or replacement, manufacturing defects that
become apparent within one year from the date of sale.
Sales of P5,000,000 were made evenly throughout 2021. The
expenditures for warranty repairs and replacements for the
products sold in 2021 are expected to be made 50% in 2021
and 50% in 2022.
The 2022 outflows of economic benefits related to the
warranty will take place on December 31, 2022.
The entity estimated that 75% of products sold require no
warranty repairs, 15% of products sold require minor repairs
costing P100,000 and 10% of products sold require major
repairs costing P400,000.
An appropriate risk adjustment factor to reflect the
uncertainties in the cash flow estimates is an increment of
6% to the probability weighted expected cash flows.
The appropriate discount factor for cash flows expected to
occur on December 31, 2022 is 0.94.
1. What amount should be reported as warranty expense
for 2021?
a. 500,000
b. 498,200
c. 514,100
d. 530,000
2. What amount should be reported as warranty liability
on December 31, 2021?
a. 265,000
b. 249,100
c. 250,000
d. 235,000
105
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