A manufacturer gives warranties at the time of sale to purchasers of its product.

Under the terms of the

contract for sale the manufacturer 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 Php10,000,000 were made evenly throughout 2015.

At December 31, 2015 the expenditures for warranty repairs and replacements for the product sold in
2015 are expected to be made 50 percent in 2015 and 50 percent in 2016. Assume for simplicity that all
the 2016 outflows of economic benefits related to the warranty repairs and replacements take place on
June 30, 2016.

Experience indicates that 95 percent of products require no warranty repairs, 3 percent of products sold
require minor repairs costing 10 percent of sales price; and 2 percent of products sold require major
repairs and replacement costing 90 percent of sales price. There is no reason to believe future warranty
claims will be different from its experience.

At December 31, 2015 the discount rate for expected cash flows is 10.25 percent for 2016. Furthermore,
an appropriate risk adjustment factor to reflect uncertainties in the cash flow estimates is an increment
of 6 percent.

On December 31, 2015, the entity recognizes a warranty provision measured at:

ANSWER: Php106,000

Expected cash flow:

Minor repairs P10,000,000 x (3% x 10% ) Php30,000

Major repairs and replacement

P10,000,000 x (2% x 90 %) 180,000

Total

To be paid in 2016 (210,000 x 50%)

Risk adjusted amount (105,000x 106 %)

PV factor [1/(1+0.1025) (6/12)]

Warranty Provision (111,300 x 0.9524)

111,300
0.9524

Php106,000

Question No.18 (AVERAGE)