CORONA CO. is a newly formed business selling personal protection equipment through a few stores nationwide. It has a full refund policy for any item returned within 5 days of its purchase provided that the security seal of the packaging is not broken or tampered with. CORONA also provides warranty against manufacturing defects on high-value items for 3 months from the date of purchase. These faulty equipment are credited with cost of goods and returned to the supplier as defective. One of CORONA's supplier, HOOHAA Supplier, sells these equipment at a negotiated discount to compensate CORONA for any manufacturing defects.

A markup on cost of 25% is placed on all of CORONA's items for sale, except for those supplied by HOOHAA which is marked up on cost at 40%. 20% of the goods sold by CORONA are items supplied by HOOHAA. Sales for the month of December amount to P1.75 million. A market study reveals that 10% of these goods are returned within 5 days from the purchase date, but are not defective. 70 percent of these items returned, are later sold at the normal selling price while the rest are sold at half the normal price.

 It is also estimated that P160,000 of the sales are defective but have not yet been returned by customers. These returned defective items have no resale value.Of these, 70% are later sold at the normal selling price and the remaining 30% are sold as "sale" items at half the normal retail price. In addition to the above expected returns, an estimated P160,000, at selling price, of the goods sold during the year will have manufacturing defects and have yet to be returned by customers. Goods returned as faulty have no resale value.

How much provision should the company recognize from these goods that are subject to the 5 day full refund policy? 

How much provision should the company recognize from these goods that are likely to be defective?

Answer rating: 100% (QA)

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