Provision for Warranty of Goods ( video below)
XYZ Co sells goods with a one year warranty and had a provision for warranty claims of $16,000 at 31 December 20X2. During the year ended 31 December 20X3, $6,250 in claims were paid to customers. On 31 December 20X3, XYZ Co estimated that the following claims will be paid in the following year:
| Scenario | Probability | Anticipated cost |
| Worst case | 10% | $37,500 |
| Best case | 20% | $6,250 |
| Most likely | 70% | $15,000 |
What amount should XYZ Co record in the statement of profit or loss for the year ended 31 December 20X3 in respect of the provision?
Answer
statement of profit or loss
| $ | |
| Provision required at 31.12.X3 = | |
| (0.10 x 37,500)+(0.20 x 6,250)+(0.70 x 15,000) | 15,500 |
| Provision b/f at 31.12.X2 | (16,000) |
| Utilised during year | 6,250 |
| Increase required – charge to SPL | 5,750 |
| Statement of Financial Position | |
| Provision c/f at 31.12.X3 | 15,500 |
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