K2 Inc. manufactures equipment for individual and team sports including skiing,
ID: 2419809 • Letter: K
Question
K2 Inc. manufactures equipment for individual and team sports including skiing, snowboarding, and in-line skating. The company offers a one-year warranty on all products. During 2014, the company recorded net sales of $1,934.7 million. Historically, about 2% of all sales are returned under warranty and the cost of repairing and/or replacing goods under warranty is about 50% of the retail value. Assume that at the start of the year K2’s balance sheet included an accrued warranty liability of $8.43 million and at the end of the year the accrued warranty liability balance was $6.49 million.
1. Calculate K2’s warranty expense for 2014.
a. $1.94 million
b. $10.92 million
c. $19.35 million
d. $25.84 million
e. None of the above
Explanation / Answer
Answer: c 19.35 million
K2 should record the estimated cost of product warranties at the time sales are recognized. To do this, the company should estimate warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, K2 should revise its warranty liability. Warranty claims will be made on 2% of sales and the repair / replacement cost will be 50% of the retail value. Thus, warranty expense for 2014 will be $1,934.7 million × 2% × 50% = $19.347 million
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