Question

Hall Company sells merchandise with a one-year warranty. In the current year, sales consisted of 4,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in the current year and 70% in the next year. In the current year's income statement, Hall should show warranty expense of

• $13,500
• $31,500
• $0
• $45,000

Answer 1

Warranty Expenses for the year = 4,500 Units x $10 = $45,000

Warranty Expenses is recognised in the year fully with the year they relates.

By using the past experience / techinical specification the company estimates the warranty expenses and record the warranty expenses in the year they are related and give credit to Warranty liability account.

So the repair under warranty period is adjusted with the warranty liability account.

Hence the Warranty Expenses for the current year is $45,000