During 2001 Davidson Company introduced a new line of machines that carry a thre

Question

During 2001 Davidson Company introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based in industry experience, warranty cost are estimated at 2% of sales in the year of sale and 6% in the second year after the sale. Sales and actual warranty expenditures for the first three-year period were as follows:

Year Sales Actual Warranty Expenditures
2001 $ 200,000 $ 3,000
2002 500,000 15,000
2003 700,000 45,000
$1,400,000 $ 63,000

What amount should Davidson report as a liability at December 31, 2003?
a. $0 b. $ 49,000 c. $ 68,000 d. $ 105,000
please show work

Explanation / Answer

Warranty expenditure in 2002 on sale of $500,000 at2% =10000
but expenditure incurred is =15000
Balance of warranty expenditure =5000
warranty expenditure of 2002 in 2003 on $500000at6% =30000
warranty expenditure of 2003 on sales of 700000at 2% =14000
Total liability(5000+30000+14000) =$49,000

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