Question

During 2010, Vanpelt Co. 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 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: a. Sales Actual Warranty Expenditures 2010 $ 600,000 $ 9,000 2011 1,500,000 45,000 2012 2,100,000 135,000 $4,200,000 $189,000 What amount should Vanpelt report as a liability at December 31, 2012? a. $0 b. $15,000 c. $204,000 d. $315,000.

Answer 1

solution Total sales = 4200000 Total estimated warranty costs: 2% +4% +6% = 12% Hence estimated warranty cost = 12% of 420000 = 504000 Lessor warranty Experdeture = 189000 Hence, Estimated tability = 315000 315000 The Answer is (d) 315000,