Question

During 2016, Coronado Industries introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 1% of sales in the year of sale, 2% in the year after sale, and 3% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:

		Sales			Actual Warranty Expenditures
2016			$1399000			$25000
2017			999000			40000
2018			1399000			90000
			$3797000			$155000

What amount should Coronado report as a liability at December 31, 2018?

Answer 1

Solution Total sales = 3 797000 Total estimated warranty costs = 1%+ 2% + 3% = 6% Hence, Estimated warranty Cost = 6% of 3797000 3 227820 Lesse warranty Expenditure here, 155000 Hence, Estimated Leability 72820