Star Company has recently launched a new model of consumer car. Its cars are sold with a three-year warranty for manufacturing defects. Past experience of similar models indicates that about 10% of the cars sold are with some defects, of which 4% are minor defects, 3% are normal defects and 3% are major defects. For the year ended December 31, 2011, the company sold 10,000 units of the new model. The following information relates to the estimate of costs of defects associated with the new model: Major defects P7,000 5,000 2,000 Cost of repair/unit High Probability 30% Minor defects Normal defects P1,500 P4,000 Medium 1,200 3,000 1,500 60% Low 10% 1,000 What amount of provision should the company recognize for the year ended December 31, 2011? c. P1,590,000 d. P3,043,000 a. None b. P1,445,000
Star Company has recently launched a new model of consumer car. Its cars are sold with a three-year warranty for manufacturing defects. Past experience of similar models indicates that about 10% of the cars sold are with some defects, of which 4% are minor defects, 3% are normal defects and 3% are major defects. For the year ended December 31, 2011, the company sold 10,000 units of the new model. The following information relates to the estimate of costs of defects associated with the new model: Major defects P7,000 5,000 2,000 Cost of repair/unit High Probability 30% Minor defects Normal defects P1,500 P4,000 Medium 1,200 3,000 1,500 60% Low 10% 1,000 What amount of provision should the company recognize for the year ended December 31, 2011? c. P1,590,000 d. P3,043,000 a. None b. P1,445,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:.Star Company has recently launched a new model of consumer car. Its cars are
sold with a three-year warranty for manufacturing defects. Past experience of
similar models indicates that about 10% of the cars sold are with some defects,
of which 4% are minor defects, 3% are normal defects and 3% are major defects.
For the year ended December 31, 2011, the company sold 10,000 units of the
new model. The following information relates to the estimate of costs of defects
associated with the new model:
Cost of repair/unit
High
Probability
30%
Minor defects Normal defects
P1,500
Major defects
P7,000
P4,000
Medium
60%
1,200
3,000
5,000
Low
10%
1,000
1,500
2,000
What amount of provision should the company recognize for the year ended
December 31, 2011?
a. None
c. P1,590,000
b. P1,445,000
d. P3,043,000
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