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The answer for this quetsion is A. However, would anybody explain for me that why the 1st item is under creating a provision?
My understanding is since only 5% of sales give rise to a warranty claim, so it is under possible,
It is virtually certain that there will be warranty claims. How many there will be this year may be 5% (or maybe more or maybe less) but it is virtually certain that there will be some claims.
Think of shop selling TV’s. In the past 5% of TV’s have come back for repairs. How likely is it that this year some will come back for repairs? It is virtually certain (it will be a miracle if none come back this year). In estimating the amount of the provision, you would probably use 5% unless you thought that for some reason it might be different that 5%, but you are not asked to estimate the amount.
Thank you Sir, I got it. Basically, the 5% of sales is the number of how many warranty claim, not the possibility of having warranty claim.
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