Reference no: EM133156168

Question - A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On the basis of experience, it is probable that there will be some claims under the warranties.

In 2020, goods are sold for P1,000,000. Experience indicates that 90 percent of products sold require no warranty repairs, 4 percent of products sold require minor repairs costing 30 percent of the sale price, and 6 percent of products sold require major repairs or replacement costing 70 percent of sale price. The expenditures for warranty repairs and replacements for products sold in 2020 are expected to be made 60 percent in 2021, 10 percent in 2022 and 30 percent in 2023 in each case at the end of the period.

The entity uses a 'risk free' discount rate based on government bonds to determine the present value of cash flows Discount factors relevant to the transaction are as follows:

Required - Compute the warranty obligation at the end of 2020.