Question # 1A car dealership also owns a workshop it uses for servicing cars under warranty. Inpreparing financial statements, the car dealership needs to ascertain the provision ofwarranty that it would be required to provide at year-end. The entity’s past experiencewith warranty claims is1. 60% of cars sold in a year have zero defects.2. 25% of cars sold in a year have normal defects.3. 15% of cars sold in a year have significant defects.The cost of rectifying a “normal defects” in a car is Rs. 10,000. The cost of rectifying a“significant defects” in a car is Rs. 30,000.Required: Compute the amount of “provision for warranty” needed at year –end

To calculate the provision for warranty needed at year-end, we need to consider the cost of rectifying defects and the percentage of cars that are likely to have these defects based on past experience.

1. For cars with normal defects: 25% of cars sold in a year have normal defects and the cost of rectifying a normal defect is Rs. 10,000. Therefore, the provision for warranty for cars with normal defects is 25/100 * Rs. 10,000 = Rs. 2,500 per car.

2. For cars with significant defects: 15% of cars sold in a year have significant defects and the cost of rectifying a significant defect is Rs. 30,000. Therefore, the provision for warranty for cars with significant defects is 15/100 * Rs. 30,000 = Rs. 4,500 per car.

3. For cars with zero defects: 60% of cars sold in a year have zero defects. Since these cars do not have any defects, there is no cost of rectifying defects and hence, no provision for warranty is needed for these cars.

Therefore, the total provision for warranty needed at year-end per car is Rs. 2,500 (for normal defects) + Rs. 4,500 (for significant defects) = Rs. 7,000.

To get the total provision for all cars, you would need to multiply this amount by the total number of cars sold in the year.