Question

During 2015, Blevert Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 1% of sales in the year of sale, 3% in the year after sale, and 5% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2015 $500,000 $6,000
2016 1,500,000 25,000
2017 2,000,000 105,000
$4,000,000 $136,000
What amount should Blevert report as a liability at December 31, 2017?

Answer 1

Answer:

The amount of $224,000 should Blevert report as a liability at December 31, 2017

Explanation:

For computing the liability amount, we have to do the following calculations which is shown below:

= (Total sales value over the three year × sum of estimated warranty cost percentage for three year) - total warranty expenditure

= {$4,000,000 × (1% + 3% + 5%)} - ($136,000)

= {$4,000,000 × 9%} -  ($136,000)

= $360,000 - $136,000

= $224,000