Question

Provisions

GP LLC provides warranties at the point of sale to its buyers. In relation to the warranties, the manufacturer promises to repair or replace defects that become apparent within 10 years from the date of sale. Drawing on past experience, the manufacturer expects that 5% of goods sold require repair that costs 30% of sale price; 25% of goods sold require repair that costs 35% of sale price; and remaining 10% of goods sold require repair or replacement costing 100% of sale price. Besides, GP LLC anticipates that expenditures for warranties for goods sold in 2018 are going to be incurred 45% in 2019, 35% in 2020, and 20% in 2021 (at the end of year in each period). Discount rate is 10% per annum. In 2018, the Company sold 100 million units of each Type A machinery with cost of 500 million USD at 20% gross profit, Type B machinery with cost of 450 million at 15% gross profit, and Type Cmachinery with cost of 800 million USD at 15% markup.

Required: Determine the amount of warranty obligation that the manufacturer shall recognize for year 2018.

Answer 1

	A	B	C	TOTAL	PVF@10%	PRESENT VALUE
UNITS SOLD (MILLION)	100.00	100.00	100.00
COST ($ MILLION)	500.00	450.00	800.00
SALE PRICE ($ MILLION)	625.00	529.41	920.00
SELLING PRICE	6.25	5.29	9.20
5% REQUIRE REPAIR COSTING 30% OF SALE PRICE ($ MILLION)	9.38	7.94	13.80
25% REQUIRE REPAIR COSTING 35% OF SALE PRICE ($ MILLION)	54.69	46.32	80.50
10% REQUIRE REPAIR COSTING 100% OF SALE PRICE ($ MILLION)	62.50	52.94	92.00
	126.56	107.21	186.30	420.07
2019: 45% WARRANTY EXP ($ MILLION)				189.03	0.9091	171.85
2020: 35% WARRANTY EXP ($ MILLION)				147.02	0.8264	121.51
2021: 20% WARRANTY EXP ($ MILLION)				84.01	0.7513	63.12
WARRANTY OBLIGATION TO BE RECOGNISED FOR YEAR 2018 ($ MILLION)						356.47