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  • Expected Value Method

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    Seunghyun Park
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    The entity sells goods with a 6-month warranty covering repair costs for manufacturing defects. Based on past experience, 75% of goods will have no defects, 20% will have minor defects costing P1,000,000 total to repair, and 5% will have major defects costing P5,000,000 total. The expected repair cost is calculated as P0 for 75% of goods, P200,000 for 20% with minor defects, and P250,000 for 5% with major defects, totaling P450,000.

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    The entity sells goods with a 6-month warranty covering repair costs for manufacturing defects. Based on past experience, 75% of goods will have no defects, 20% will have minor defects costing P1,000,000 total to repair, and 5% will have major defects costing P5,000,000 total. The expected repair cost is calculated as P0 for 75% of goods, P200,000 for 20% with minor defects, and P250,000 for 5% with major defects, totaling P450,000.

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    © All Rights Reserved
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    12 views1 page

    Expected Value Method

    Uploaded by

    Seunghyun Park
    The entity sells goods with a 6-month warranty covering repair costs for manufacturing defects. Based on past experience, 75% of goods will have no defects, 20% will have minor defects costing P1,000,000 total to repair, and 5% will have major defects costing P5,000,000 total. The expected repair cost is calculated as P0 for 75% of goods, P200,000 for 20% with minor defects, and P250,000 for 5% with major defects, totaling P450,000.

    Copyright:

    © All Rights Reserved
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    ILLUSTRATION 1.

    EXPECTED VALUE METHOD

    An entity sells goods with a warranty under which customers are covered for the cost of repairs of any
    manufacturing defects that become apparent within 6 months after purchase.

    If minor defects are detected in all product sold, repair costs would be about P1,000,000.

    If major defects are detected in all product sold, repair costs of P5,000,000 would result.

    The entity’s past experience and future expectations indicate that 75% of the goods sold will have no
    defects, 20% will have minor defects and 5% will have major defects.

    The expected value or cost of repairs is measured as follows:

    75% sales P0
    20% sales (20% x 1,000,000) 200,000
    5% sales (5% x 5,000,000) 250,000_
    Total expected value or cost of repairs P450,000

    Journal Entry:

    Warranty expense 450,000


    Warranty liability 450,000

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