Question

Ayayai 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—1% 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 Sales $750,000 1,000,000 1,000,000 Warranty Expenditures $15.900 46,000 79,500 2019 2020 (a) Calculate the amount that Ayayai 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 $

Answer 1

1.Warranty expense=$15900+$46000+$79500 (Given)

=$141,400

2.Warranty liability=Sales*persentage of warranty cost

2018= $750,000*1% =$7,500

2019= $1,000,000*2% =$20,000

2020= $1,000,1000*3% =$30,000

Total lability =$57,500