A company has a warranty provision of £18,000 at the start of the year. During the year it paid warranty claims of £11,500 and these were charged against the provision. At the year end it estimates that future claims will total £20,000. What is the charge to the statement of profit or loss for the year in respect of the warranty provision?
Answer and explanation
Correct answer: B. £13,500
- Step 1: Provision after claims = £18,000 − £11,500 = £6,500.
- Step 2: Required closing provision = £20,000.
- Step 3: Charge to profit or loss = £20,000 − £6,500 = £13,500 (an increase in the provision).
Answer
£13,500.
Why not the others: £20,000: This charges the full closing provision, ignoring the balance already carried forward. £2,000: This ignores the claims paid during the year, which reduced the provision. £11,500: This is the claims paid during the year and not the charge needed to reach the year-end provision.
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