Question

Bear Lake Industries (BLI) sells appliances. During 2015, it sold 550 dishwashers for an average sales price of $485. At the time of sale, BLI offers an extended three-year warranty contract on the dishwashers for $120 each. For 2015, customers purchased warranty contracts for 215 of these dishwashers. For simplicity purposes, assume all dishwashers and warranty contracts for 2015 were sold on the last day of the year.

BLI expects to pay $40 per dishwasher in servicing these warranties as follows:

20% in the 12 months following sale (2016)
30% in the next 12 months following sale (2017)
50% in the third twelve months (2018)
BLI actually paid $1,500 in 2016 and $3,300 in 2017. Assume that as a result of the actual warranty costs incurred, at the end of 2017 BLI changes its cost estimate to $48 per dishwasher warranty.

BLI opted to recognize revenue from the sale of the extended warranties pro-rata over the three-year term of the warranties.

Based solely on the 2015 extended warranty contracts sold, how much of 2015 sales should BLI report in its 2015 net income?

Answer 1