During 2009, Stabler Co. introduced a new line of machines that carry a three-ye

Question

During 2009, Stabler 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 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2009 $ 400,000 $ 6,000
2010 1,000,000 30,000
2011 1,400,000 90,000
$2,800,000 $126,000

What amount should Stabler report as a liability at December 31, 2011?
a. $0
b. $10,000
c. $136,000
d. $210,000

Explanation / Answer

The answer is d.210,000 Total Sales - 2,800,000 Total Estimated Warranty Costs : 2% + 4% + 6 % =12% Hence Estimated Warranty Costs : 12% of 2,800,000 = 336,000 Less : Warranty Expenditure                                    126,000 Hence, Estimated Liability                                 210,000

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