Question

intermediate accounting 2

Sheffield Corporation manufactures a line of amplifiers that carry a three-year warranty against defects. Based on experience, the estimated warranty costs related to dollar sales are as follows: first year after sale-19 of sales; second year after sale-2% of sales; and third year after sale-3% of sales. Sales and actual warranty expenditures for the first three years of business were: 2018 2019 2020 Sales $800,000 1,070,000 1,025,000 Warranty Expenditures $16,400 47,000 83,000 (a) Calculate the amount that Sheffield Ltd, should report as warranty expense on its 2020 income statement and as a warranty liability on its December 31, 2020 SFP using the assurance-type warranty (expense-based approach). Assume that all sales are made evenly throughout each year and that warranty expenditures are also evenly Spaced according to the rates above. Warranty expense Warranty liability 27300 LINK TO TEXT LINK TO TEXT

Answer 1

Required:

Total sales = $800,000 + $1,070,000 + $1,025,000 = $2,895,000

Estimated warranty cost related to dollar sales = 1% + 2% + 3% = 6%

• Warranty expenses = $2,895,000 * 6% = $173,700
• Warranty liability = $173,700 - Actual warranty expenditure

= $173,700 - ($16,400 + $47,000 + $83,000)

= $173,700 - $146,400

= $27,300.

Answers:

Warranty expenses	$173,700
Warranty liabilities	$27,300