Question

During 2016 Green Thumb Company introduced a new line of garden shears that carry a two-year warranty against defects. Experience indicates that warranty costs should be 2% of net sales in the year of sale and 3% in the year after sale. Net sales and actual warranty expenditures were as follows:

	Net sales				Actual warranty expenditures
2016	$	45,000			$	1,000
2017		120,000				3,500

At December 31, 2017, Green Thumb should report as a warranty liability of:

Multiple Choice

• $900

• $1,250

• $3,750

• $4,500

Answer 1

Answer

• Correct Answer = Option #3: $ 3,750
• Calculation:
  --Alternative #1
  = (45000 x 3%) + (120000 x 2%) = $ 3,750

--Alternative #2
= (2% + 3%) x (45000 + 120000) – (1000 + 3500)
= (5% x 165000) – 4500
= 8250 – 4500
= $ 3,750