Question

Lulzbot sells 6,000 units of its product for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 120 units for a total cost of $6,000. What amount should Lulzbot accrue on December 31 for estimated warranty costs?

Answer 1

Answer:

$3,000

Explanation:

Warranty expense is an obligation on the business because business is liable to accept the claims of warranty. A estimated percentage of warranty expense is charges as an expense in each period.

Total Sales = $500 x 6,000 units = $3,000,000

Warranty Expense for the year = Sales units x 3% x warranty cost per unit

Warranty Expense for the year = 6,000 x 3% x $50 = $9,000

Recognised warranty cost in the year = 120 units x $50 = $6,000

Accrued Warranty expense = $9,000 - $6,000 = $3,000