ExpertEasy2 marksMultiple Choice
ACCA · Question 19 · Provisions and Contingencies
SECTION B - CASE 1: AeroTech Drones
AeroTech Drones Co manufactures specialized agricultural drones. The year-end is 31 December 20X5.
AeroTech sells its drones with a standard one-year warranty. Based on past experience, 80% of drones will have no defects, 15% will have minor defects costing $200 to repair, and 5% will have major defects costing $1,000 to repair. During 20X5, AeroTech sold 5,000 drones.
What is the expected value of the warranty provision required at 31 December 20X5?
SECTION B - CASE 1: AeroTech Drones
AeroTech Drones Co manufactures specialized agricultural drones. The year-end is 31 December 20X5.
AeroTech sells its drones with a standard one-year warranty. Based on past experience, 80% of drones will have no defects, 15% will have minor defects costing $200 to repair, and 5% will have major defects costing $1,000 to repair. During 20X5, AeroTech sold 5,000 drones.
What is the expected value of the warranty provision required at 31 December 20X5?
Answer options:
A.
$150,000
B.
$250,000
C.
$400,000
D.
$1,000,000
How to approach this question
Calculate the expected value (probability-weighted average) of repair costs for a single drone, then multiply by the total number of drones sold.
Full Answer
C.$400,000✓ Correct
Under IAS 37, when a provision involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities (expected value method). Expected cost per drone = (0.80 * $0) + (0.15 * $200) + (0.05 * $1,000) = $30 + $50 = $80. Total provision for 5,000 drones = 5,000 * $80 = $400,000.
Common mistakes
Calculating the provision based only on the most likely outcome (which would be $0, as 80% have no defects).
Practice the full ACCA FR — Financial Reporting Practice Exam 1
32 questions · hints · full answers · grading
More questions from this exam
Q01SECTION A
According to the IASB's Conceptual Framework for Financial Reporting, which of the fol...EasyQ02SECTION A
CloudStream Co, a software-as-a-service (SaaS) provider, enters into a contract with a...MediumQ03SECTION A
On 1 January 20X4, Titan Manufacturing Co acquired a specialized heavy-duty press for ...HardQ04SECTION A
Under IAS 36 Impairment of Assets, which of the following is an internal indicator of ...EasyQ05SECTION A
On 1 July 20X6, LogisticsPro Co entered into a sale and leaseback transaction for a fl...Hard