Reference no: EM133032902

Question - An SME gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the SME undertake 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 that there will be some claims under the warranties.

Sales of P10, 000,000 were made evenly throughout 2019.

The expenditures for warranty repairs and replacements for the products sold in 2019 are expected to be made 50%' in 2019 and 50% in 2020.

The 2020 outflows of economic benefits related to the warranty will take place on June 30, 2020.

Experience indicates that 95% of products sold require no warranty repairs, 8% of products sold require minor repairs coating 10% of the sale price, and 2% of products sold require major repairs or replacement costing 90% of sale price.

The appropriate discount factor forcash flows expected to occur on June 30,2020 is 0.95238.

Furthermore, 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.

What is the warranty provision on December 31, 2019?

a) 210,000

b) 222,600

c) 111,300

d) 106,000