How much should company a recognize as provision

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Question - In connection with the audit of liabilities, you were able to obtain the following information:

Company A is a car manufacturer who gives to its clients at the time of purchase. Under the terms of sale contract, Company A undertakes to repair manufacturing defects or replace defective parts that become apparent within 5 years from the date of sale.

Based on previous experience, it is probable that there will be some claims under warranties. Estimated cash flows related to the cars covered by warranty as of the reporting period are as follows:

 

Likelihood of occurrence

Estimated cash flows

Major defects

4%

P2,000,000

Minor defects

10%

500,000

No defects

86%

0

Required - How much should Company A recognize as provision?

Reference no: EM133115724

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