Problem
ABC Ltd sells kettle. The are sold with a six-month warranty that covers the costs of repairing any manufacturing defects that become apparent within six months of purchase. If minor defects are detected in all products sold, repair costs of $1,000,000 would result. If major defects are detected in all products sold, repair costs of $5,000,000 would result. Based on past experience and future expectations, ABC Ltd is able to estimate that 85 per cent of all toasters sold will have no defects, 10 per cent of goods sold will have minor defects, and 5 per cent will have major defects.
Task
Establish the expected costs of repairs and prepare the journal entry to record them (Show your calculation of the expected cost of repairs).