Provisions for liabilities
Real life examplee:
Solution - how to calculate a provision for warranty repairs ...?
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Next - under its annual warranty, ABC is obliged to make free repairs of the equipment it sells,
- the cost of warranty repairs amounted to GBP 2.000 in 2021, GBP 2,500 in 2022, GBP 3,000 in 2023,
- sales revenues of the equipment covered with the annual warranty amounted to GBP 25,000 in 2020, GBP 35,000 in 2021, GBP 40,000 in 2022 and GBP 38,000 in w 2023
Solution - how to calculate a provision for warranty repairs ...?
- to simplify, an assumption can be made that the repair costs from 2021-2023 relate to sales from 2020-2022
- the indicator is used to calculate the provision as at 31.12.2023 which reflects the anticipated repair costs of equipment sold in 2023 => 7.5% x 38,000 = provision of GBP 2,850
