Summary:

Actual expense:
- Use of provision in the 1st year: 500,000 + (10 x 10,000) = 600,000
- Use of provision in the 2nd year: 600,000 + (10 x 10,000) = 700,000
- Use of provision in the 3rd year: 1,200,000 + (10 x 10,000) = 1,300,000
3 years: minor defects: 2,000,000, major defects: 6,000,000, discount rate: 10%
Provision in the 1st year: (30% x 2,000,000) + (0% x 6,000,000) = 600,000
Provision in the 2nd year: (40% x 2,000,000) + (10% x 6,000,000) = 1,400,000
Provision in the 3rd year: (50% x 2,000,000) + (20% x 6,000,000) = 2,200,000
In the 1st year:
Beginning (1) At the end 31/12/Y1 (2)
PV1 = 600,000/(1+10%)^1= Use of provision: 600,000
545,455
PV2 = PV2=1,400,000/
1,400,000/(1+10%)^2=1,157,025 (1+10%)^1=1,272,727
PV3 = PV3=2,200,000/
2,200,000/(1+10%)^3=1,652,893 (1+10%)^2=1,818,182
Total PV = 3,355,373 3,090,909
 1. Dr Warranty expense: 3,355,373
Cr Warranty provision: 3,355,373

2. Use of provision
Dr Warranty provision: 600,000
Cr Cash 600,000
3. Provision: 600,000
Actual expense: 600,000
Diff: 0 (provision < actual)
,

Beg. Y1 End Y1
Warranty provision Warranty provision
0 3,355,373
600,000 335,536
3,355,373
3,355,373 3,090,909
4. Dr Finance cost: 335,536
Cr Warranty provision: 335,536
In the 2nd year:
Beginning (1) At the end 31/12/Y2 (2)
PV2 = 1,272,727 Use of provision: 700,000
PV3 = 1,818,182 PV3=2,200,000/(1+10%)^1=2,000,000
Total PV = 3,090,909 2,000,000
1. Use of provision
Dr Warranty provision: 700,000
Cr Cash 700,000
2. Provision: 1,400,000
Actual expense: 700,000
Diff: 700,000(provision > actual)
Dr Warranty provision: 700,000
Cr Warranty expense: 700,000

Beg. Y2 End Y2
Warranty provision Warranty provision
3,090,909 3,090,909
700,000 309,091
700,000
3,090,909 2,000,000
3. Dr Warranty provision 309,091
Cr Finance cost: 309,091
In the 3rd year:
 Beginning (1) At the end 31/12/Y3 (2)
PV3 = 2,000,000 Use of provision: 1,300,000
Total PV = 2,000,000 0
1. Dr Warranty expense: 2,000,000
Cr Warranty provision: 2,000,000

2. Use of provision
Dr Warranty provision: 1,300,000
Cr Cash 1,300,000
3. Provision: 2,200,000
Actual expense: 1,300,000
Diff: 900,000 (provision > actual)
Dr Warranty provision: 640,000
Cr Warranty expense: 640,000

Beg. Y3 End Y3
Warranty provision Warranty provision
2,000,000 2,000,000
1,300,000 200,000
2,000,000 900,000
2,000,000 0
4. Dr Warranty provision: 200,000
Cr Finance cost: 200,000
Change estimate
Year 1: 3rd change
Provision in the 1st year: (30% x 2,000,000) + (0% x 6,000,000) = 600,000
Provision in the 2nd year: (40% x 2,000,000) + (10% x 6,000,000) = 1,400,000
Provision in the 3rd year: (40% x 2,000,000) + (40% x 6,000,000) = 3,200,000
In the 1st year:
Beginning (1) At the end 31/12/Y1 (2)
PV1 = 600,000/(1+10%)^1= Use of provision: 600,000
545,455
PV2 = PV2=1,400,000/
1,400,000/(1+10%)^2=1,157,025 (1+10%)^1=1,272,727
PV3 = PV3=3,200,000/
3,200,000/(1+10%)^3=2,404,207 (1+10%)^2=2,644,628
Total PV = 4,106,687 3,917,355
At 31/12/Y1
PV(new) = 1,400,000/(1+10%)^1 + 3,200,000/(1+10%)^2 = 3,917,355
PV(old) = 3,090,909
Diff = 826,446
 Warranty provision
3,355,373
600,000 335,536

826,446
3,917,355
Dr Warranty expense: 826,446
Cr Warrranty provision: 826,446
Year 2: 3rd change
Provision in the 1st year: (30% x 2,000,000) + (0% x 6,000,000) = 600,000
Provision in the 2nd year: (40% x 2,000,000) + (10% x 6,000,000) = 1,400,000
Provision in the 3rd year: (45% x 2,000,000) + (40% x 6,000,000) = 3,300,000
Beginning (1) At the end 31/12/Y2 (2)
PV2 = Use of provision: 700,000
1,400,000/(1+10%)=1,272,727
PV3 = 3,300,000/(1+10%)^2= PV3=3,300,000/(1+10%)^1=3,000,000
2,727,723
Total PV = 4,000,000 3,000,000

PV (new) = 3,300,000/(1+10%)^1 = 3,000,000

PV (old) = PV3 = 3,200,000/(1+10%)^1= 2,909,091
Warranty provision
3,917,355
700,000 309,091
700,000
173,554
3,000,000
Dr Warranty expense 173,554
Cr Warranty provision 173,554
Year 3
PV (new) 0
PV (old) 0
Warranty provision
3,000,000
1,300,000 200,000
900,000
(1,000,000)
0
Dr Warranty provision 1,000,000
Cr Warranty expense 1,000,000

Note