9) During 2015, Blevert Co. introduced a new line of machines that carry a three
ID: 2485158 • Letter: 9
Question
9) During 2015, Blevert 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 1% of sales in the year of sale, 3% in the year after sale, and 5% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2015 $500,000 $6,000
2016 1,500,000 25,000
2017 2,000,000 105,000
$4,000,000 $136,000
What amount should Blevert report as a liability at December 31, 2017?
Explanation / Answer
Solution:
Calculation of the Amount of that Should Blevert report as a Liability at December 31, 2017:
Total sales over three year period
* Total expected expense over warranty period (1%+3%+5%)
9%
Total expense should be recognised over warranty period
$360,000
Less : Actual warranty expenditure
($136,000)
Warranty liability as at Dec 31,2017
$224,000
Therefore, the Amount of that Should Blevert report as a Liability at December 31, 2017 is $224,000.
Total sales over three year period
$4,000,000* Total expected expense over warranty period (1%+3%+5%)
9%
Total expense should be recognised over warranty period
$360,000
Less : Actual warranty expenditure
($136,000)
Warranty liability as at Dec 31,2017
$224,000
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