Question

On October 1, 2021, World Mattress Corp. (WMC) entered into a contract to sell mattresses. What adjustment to the provision is necessary to record at March 31, 2022?

A. $24,000
B. $96,000
C. $76,000
D. $100,000
E. $200,000

Answer 1

The necessary adjustment to the provision at March 31, 2022, is $24,000. Thus the correct option is A.

Step-by-step explanation:

The adjustment to the provision is based on the passage of time and the recognition of the expense associated with the warranty provision. Assuming that the provision was initially recognized at the inception of the contract on October 1, 2021, and it represents the estimated warranty cost for the mattresses, the adjustment is calculated by considering the time that has elapsed since the contract date. From October 1, 2021, to March 31, 2022, there are six months.

To calculate the adjustment, we use the formula:

`\[ \text{Adjustment to Provision} = \frac{\text{Total Warranty Provision}}{\text{Total Contract Duration}} * \text{Elapsed Time} \]`

Assuming the total warranty provision is $48,000 (which would cover a full year), the adjustment is:

`\[ \text{Adjustment to Provision} = \frac{\$48,000}{12 \text{ months}} * 6 \text{ months} = \$24,000 \]`

Therefore, the correct adjustment to the provision at March 31, 2022, is $24,000 (Option A). This adjustment reflects the recognition of the warranty expense for the portion of the contract period that has passed, aligning with the principle of recognizing expenses as they are incurred over time.