Question

Its line of amplifiers carries a 3-year warranty against defects. On the basis of past experience the estimated warranty costs related to dollar sales are first year after sale—2% of sales revenue; second year after sale—3% of sales revenue; and third year after sale—5% of sales revenue. Sales and actual warranty expenditures for the first 3 years of business were:

		Sales Revenue			Warranty Expenditures
2016		$ 760,900			$ 6,570
2017		1,133,300			18,310
2018		1,191,700			57,790

Liability should be reported on December 31, 2018 With some of its products, Cheyenne includes coupons that are redeemable in merchandise. The coupons have no expiration date and, in the company’s experience, 20% of them are redeemed. The liability for unredeemed coupons at December 31, 2017, was $8,590. During 2018, coupons worth $15,800 were issued, and merchandise worth $7,390 was distributed in exchange for coupons redeemed. Compute the amount of the liability that should appear on the December 31, 2018, balance sheet. Liability should be reported on December 31, 2018

Answer 1

Answer:

Estimated Warranty cost:

2016	$ 760,900	10%	$76090
2017	$ 1, 133.300	10%	$ 113330
2018	$ 1,191,700	10%	$ 119170
Total			$ 308590

Total actual warranty expenditures ( 6750 + 18310 + 57790) = $ 82850

1) Liability reported on December 31, 2018 (308590 - 82850) = 225740

2) Unredeemed coupons as of as pf 31/ 12/ 2017 $ 8590

Additional coupon liability generated by 2018

sale (15800 x 40% ) $ 6320

Coupon redeemed in 2018 - $ 7390

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Liability should be reported on December 31, 2018 $ 7520

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