Manor Inc. sells washing machines that include a two-year warranty covering parts. Experience shows that warranty...
Manor Inc. sells washing machines that include a two-year
warranty covering parts. Experience shows that warranty expense
averages about 2% of the selling price of each machine during the
first 12 months following the sale and 1% during the next 12
months. Net sales totaled $400,000 during Year 1, the company’s
first year of operations. Actual warranty costs incurred totaled
$7,900 during Year 2 and $4,000 during Year 3. What is the amount
of warranty expense that should be reported on the income statement
for Year 1?
Homework Answers
Total warranty expense in Year 1 will be $12,000 (400000*2%+400000*1%).
Since we follow accrual system we will recognize the entire $12,000 in the first year.
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