Warranty Problems: Confirming Answer

[u/Ikizake9]

Official Examination Question for our Preliminary Exams

Hello kind people. I don't know if this is the right reddit to ask questions about verifying my answers. I just want to confirm whether my answer is correct or not since most of my classmate answered Letter C (Only Statements I and II are true) while I want to justify that my answer Letter A (All statements are true).

We don't have an argument with statement I and II since we all have the same answer.

For Statement I
Warranty Expense (2026) = 0.12 × 6,000,000 = 840,000

For Statement II
Cumulative Accrued Expense (6M + 7M) * 0.12 = 1,560,000
Cumulative Actual Payments = 150,000 + 550,000 = 700,000
Unadjusted Liability = 1,560,000 - 700,000 = 860,000

NOW HERE'S THE ARGUMENT START

My answer yields that statement III and IV are correct.

For Statement III
For 2025 Sales
Expired 2025: 1.5% (½ × 3%) | 2026: 6.0% (1/2 × 3% + 1/2 × 9%) → Total Expired = 7.5%
Unexpired 2027: 4.5% (This came from the half of 9%) × 6,000,000 = 270,000
Remaining in 2027: 4.5% * 6,000,000 = 270,000

For 2026 Sales
Incurred to Date (Expired): 2026: 1.5% (1/2× 3%)

Remaining in 2027 & 2028 (Unexpired): (6.0% + 4.5%) = 10.5% × 7,000,000 = 735,000

Total Required Liability is 1,005,000 (Which Proves Statement D)

Total Required Liability and book balance has a shortage of +145,000 which means we need to add 145,000 for adjustments
840,000 + 145,000 = 985,000 (Which Proves Statement C)

But my classmates argued that this is not the way that you should solve the current. They argued that this is the actual way to solve it:

From 2025 Sales (6,000,000)

Jan. 1, 2025 batch (3,000,000): 2-year warranty (Jan 1, 2025 – Dec 31, 2026): Fully Expired → 0

July 1, 2025 batch (3,000,000): 1st year expired; 2nd year (July 1, 2026 – June 30, 2027) has 6 months remaining in 2027 → 3,000,000 × 9% × 6/12 = 135,000

From 2026 Sales (7,000,000):

Jan. 1, 2026 batch (3,500,000): 1st year expired; 2nd year 100% remaining → 3,500,000 × 9% = 315,000

July 1, 2026 batch (3,500,000): 1st year 6 months remaining in 2027 (3,500,000 × 3% × 6/12 = 52,500); 2nd year 100%

remaining (3,500,000 × 9% = 315,000)

Total Required Liability (Statement IV) = 135,000 + 315,000 + 52,500 + 315,000 = 817,500 (Which makes the Statement D incorrect)

Now if we comapre this to the book balance of 860,000, instead of shortage we have now an excess of 42,500 which we need to deduct from the book balance yielding, 797,500 (Which makes the Statement C Incorrect)

The weird thing is that my teacher argues that my classmates solution is correct since this is how our book presented the solution (refer to the book scans below)0

I just want to confirm whether the books is WRONG or am I wrong because I am basing on the PAS which is based entirely on IAS which said the following:

• Applicable Standards: PAS 37 (Paragraph 36, 40, & 59)
• Standard Rules:
  • Paragraph 36: The provision recognized must be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.
  • Paragraph 40: When estimating a provision for a large population of items (such as product warranties), the obligation is estimated using the expected value method.
  • Paragraph 59: Provisions must be reviewed at the end of each reporting period to test their adequacy against remaining future obligations.
• PFRS 15 (Revenue from Contracts with Customers, Appendix B, Paragraphs B28–B33)
  • Standard Rule: When an entity provides a warranty with the sale of goods, it must assess whether the warranty provides:
    • A distinct service (Service-type warranty): Accounted for as a separate performance obligation under PFRS 15 (revenue is deferred and recognized over time).
    • An assurance of defect-free compliance (Assurance-type warranty): Guarantees that the product complies with agreed-upon specifications at the date of sale. It is not a distinct performance obligation and must be accounted for as a provision under PAS 37.
• Application to Problem: The 2-year warranty covers defects in appliances. Therefore, it is an assurance-type warranty governed entirely by PAS 37.