Jamison Company uses IFRS for its financial reporting. It produces machines that

Question

Jamison Company uses IFRS for its financial reporting. It produces machines that sell globally. All sales are accompanied by a one-year warranty. At the end of the year, the company has the following data:

• 3,000 units were sold during the year.
• The trend over the past five years has been that 4% of the machines were defective in some way and had to be repaired. Of this 4%, half required a full replacement at a cost of $3,000 per unit and half were able to be repaired at an average cost of $300.

What is the expected value of the warranty cost provision?

A) $396,000

B) $180,000

C) $198,000

D) $360,000

Explanation / Answer

Warranty Cost provision is calculated as under:

3,000*4%*50%*3,000 = $180,000

3,000*4%*50%*300 = 18,000

So, the warranty cost provision is C 198,000

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