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?
A) Warranty Expense $3,600,000
B) Warranty Expense $555,000
C) Warranty Provision $555,000
D) Warranty Provision $500,000

Question

Quizplus · Accepted Answer

The credit in the journal entry to recognize the provision is calculated by multiplying each potential outcome by its probability and summing these products: (0.30 * $100,000) + (0.45 * $500,000) + (0.20 * $1,000,000) + (0.05 * $2,000,000) = $30,000 + $225,000 + $200,000 + $100,000 = $555,000. This amount represents the expected value of the warranty damages, which is recognized as a provision.

Recently Silph Entity (SE) Discovered a Defect in One of Their