Fresh Products Ltd. is gathering evidence to support an acerual for warranty claims. The warranty is...

 

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Fresh Products Ltd. is gathering evidence to support an acerual for warranty claims. The warranty is offered on three products sold to ensure that they operate as expected. For Product 1, there are 75 warranty claims outstanding. One-third have a potential value of $1.000 each (90% of these will be paid, based on past history), one-third have a potential value of $5.000 each (70% of these will be paid), and one-third have a potential payout of $12,000 each (60% will be paid). The claims that are not paid are likely to be dismissed because of an expired warranty or incorrect statement of damages. For Product 2, there are only nine claims outstanding: however, all are large, at $50,000 each. The experienced claims adjustor reviewing the files is completely confident that eight will be dismissed without any payment. For the remaining claim, there is a 60% chance that it will have to be paid in full and a 40% chance that it will be dismissed. Product 3 has only one potential claim outstanding. The claim is for $1,000,000. and the adjustor believes that there is a 60% chance it will be dismissed, a 10% chance it will result in a payout of $1,000,000, and a 30% chance that there will be a payout of $200,000, Required: Indicate the amount that should be recorded as a warranty provision for each product. Page 884 Fresh Products Ltd. is gathering evidence to support an acerual for warranty claims. The warranty is offered on three products sold to ensure that they operate as expected. For Product 1, there are 75 warranty claims outstanding. One-third have a potential value of $1.000 each (90% of these will be paid, based on past history), one-third have a potential value of $5.000 each (70% of these will be paid), and one-third have a potential payout of $12,000 each (60% will be paid). The claims that are not paid are likely to be dismissed because of an expired warranty or incorrect statement of damages. For Product 2, there are only nine claims outstanding: however, all are large, at $50,000 each. The experienced claims adjustor reviewing the files is completely confident that eight will be dismissed without any payment. For the remaining claim, there is a 60% chance that it will have to be paid in full and a 40% chance that it will be dismissed. Product 3 has only one potential claim outstanding. The claim is for $1,000,000. and the adjustor believes that there is a 60% chance it will be dismissed, a 10% chance it will result in a payout of $1,000,000, and a 30% chance that there will be a payout of $200,000, Required: Indicate the amount that should be recorded as a warranty provision for each product. Page 884

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