Question

An entity offers a 2 year warranty program on all the products is sells. They estimate that warranty costs will equal 3% of sales in the first year of the warranty and 1% of sales in the second year of the warranty. In the first year, total sales amounted to 52909041. Warranty costs incurred to service products under warranty was 534227. What is the warranty expense for the first year? Select one: a. 534227 b. 587271 c582135 d. 5116362 Check

Please show all steps so I can fully understand how to solve. Thank you

Answer 1

Warranty expense for the 1st year =

Sales in 1st year = $2909041

Warranty provision in 1st year = 3 % of total sales in 1st year

Warranty expense provision = $2909041 × 3%

= $87271

Since, it is already given in the question that warranty costs have been incurred amounting to $34227. So, this is actual expense and $87271 is a provision created.

Therefore, the correct answer is option (a), $34227.