Exam 24: Provisions, Contingent Liabilities, and Contingent Assets

If management cannot reliably establish a percentage, but instead an estimated range, management should recognize the provision using the midpoint.

Climbing Entity (CE) started selling harnesses to mountain climbers around the world in 20X7. In November, 20X8, CE discovered that a buckle on its harnesses was defective and failed when the harness was heavily stressed. FE has a warranty policy against defective harnesses and anticipates (it is more likely than not) that thousands of harnesses will be returned to the entity. -CE has determined that it needs to recognize a provision relating to the faulty harnesses it sold. Management has assembled the following data: • Number of harnesses sold - 75,000 • Harnesses anticipated to have no defects - 70% • Harnesses anticipated to have minor defects - 20% • Harnesses anticipated to have major defects - 10% • Management estimates that the cost of repairing each harness with a minor defect is $40 and a major defect $120, What is CE's journal entry on December 31, 20X8?

Which of the following is not a provision?

When a provision involves a large number of items, the entity may report the most likely scenario.

Recently Silph Entity (SE) discovered a defect in one of their long-range cameras. The Head of Product Development has stated that it is more likely than not that they would have to replace or reimburse a significant number of cameras. SE estimates that there is a 30 percent chance of $100,000, a 45 percent chance of $500,000, a 20 percent chance of $1,000,000, and a 5 percent chance of $2,000,000 in warranty damages in each of the respective scenarios. What is SE's credit in the journal entry to recognize the provision?