Question

Assume now that we use the "usual accrual" method to account for warranties during the first 2 years after a sale. However, we also sell an "extended 2-year warranty" for $30 per unit, in addition to the $5k price/unit. Thus, assume we sell 1,000 extended warranties at $30 each in January 2kA. Account for this using the warranty sales method, assuming only 10% of units covered normally need repair during any given 2-year period, and the average cost per repair is $200. What is the expected profit per extended warranty sold? Account for actual extended warranty repair costs of $100k, $150k in years C and D (the extended warranty coverage period).

explanation appreciated

Answer 1

The actual cost of repairs would be first adjusted against the balance of Provision for Repairs. The rest would be charged the Profit and Loss Account.

The expected profit is asked in the question. Thus the student needs to be careful while reading the question. While calculating the expected profit , you should not consider the actual repairs.

Years Warranty Sold Sale 21 Assumption Average Price $30/unita 1 ,000 wartoties a 104. (e, 100 warranties = $200 / unit Cost expected frofit z ? Actual Cost Year i 100k 2² Isok - 2sok & Answe'- o Sales of Wiranty $ 30,000 expected (1.000 Cost (20,000) (1) 107. (x) 200) expected 10,000 $ Profit - Accounting :- Repair Cost De To Provision To Bank or Alc 60,000 10,000 100.000 (Being Repair Cost).

por Year of Repair Cost Bark Dec To, AK 150,000 150,000 (Bring Repair Cost haid). TOOLS