Answer to Question #117167 in Accounting for Cioza Oluoch

Question

Computer Garage sells iPad for cash sh at 80,0000 inclusive of one year unlimited International warranty of any manufacturers defects. The management is concerned about the rising cost of warranty and have recommended provisions to be created with effect from 2014.Estimates from the sale department indicates the following.
Defect type minor ,major and replacement.
Percentage of units sold 2% ,0.5% ,0.1% .
Estimated cost per unit 2300, 6000 and 18600 .
Summary of cashbook and warranty contains the following
Year ended 31st March 2014 ,31st March 2015 ,31 st March 2016.
Warranties paid (ksh) 654,000 ,450,900, 346 200.
Warranty contracts in force ( units) 15,000 ,24,800 ,18,400 .
Required.
Compute the warranty provisions required at each year.
Prepare the provisions for product warranty account.

Answer 1

Provisions for warranties

For the customer, the specific warranty period and the specific warranty terms are part of the basis of the individual contract. Warranty provisions include only standard warranty, whereas services purchased in addition to the standard warranty are included in the service contracts.

Multiply your warranty claim percentage by the amount of your sales in the current year to calculate your warranty reserve liability for the current year. For example, if you generated $100,000 in sales for the current year, multiply $100,000 by 0.02.

https://accountsexamples.com/warranty-provisions-ias-37-disclosures-estimates/