During 2006, Younger Co. introduced a new line of machines that carry a three-ye

Question

During 2006, Younger 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, respectively, were $600,000 and $9,000 for 2006, $1,500,000 and $45,000 for 2007, and $2,100,000 and $135,000 for 2008. What amount should Younger report as a liability at December 31, 2008?

Explanation / Answer

Solution -

We will first calculate the estimated liabilty @ of 12% of sales and then reduce the actual expenditures - Below is the calculation for liability at December 31, 2008

Year1 Year2 Year3 Total A Sales 600000 1500000 2100000 4200000 B Warranty expense is 12% of sales (2+4+6) 12% 12% 12% 12% E= A x B Estimated Warranty Liability 72000 180000 252000 504000 C Cost of repair 9000 45000 135000 189000 E - C Remaining liabilty at the end of Dec 08 63000 135000 117000 315000

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