Reference no: EM132887380

An SME gives warranties at the time of sale to purchasers of its product. Under the terms of the sale, the SME undertakes 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 10,000,000 were made evenly throughout 2020.
• The expenditures for warranty repairs and replacement for the products sold in 2020 are expected to be made 50% in 2020 and 50% in 2021.
• The 2021 outflow of economic benefits related to the warranty will take place on June 30, 2021.
• Experience indicates that 95% of products sold require no warranty repairs, 3% of products sold require minor repairs costing 10% of the sales price, and 2% of products sold require major repairs or replacement costing 90% of sale price.
• The appropriate discounts factors for cash flow expected to occur on June 30, 2021 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 inflow.

Problem 1: What is the warranty provision on December 31, 2020?

a. 210,000
b. 222,600
c. 111,300
d. 106,000