During 2017, 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: $\begin{array}{lcc}
& \underline{\text {Sales}}& \underline{\text {
Actual Warranty Expenditures}}\
2017 & \$500,000 & 8,000 \
2018 & 1,600,000 &20,000 \
2019 &\underline{ 2,300,000} &\underline{ 100,000} \
&\$4,400,000&\$128,000
\end{array}$

What amount should Blevert report as a liability at December 31, 2018?
A) $144,000
B) $124,000
C) $161,000
D) $181,000

Question

During 2017, 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: $\begin{array}{lcc}
& \underline{\text {Sales}}& \underline{\text {
Actual Warranty Expenditures}}\
2017 & \$500,000 & 8,000 \
2018 & 1,600,000 &20,000 \
2019 &\underline{ 2,300,000} &\underline{ 100,000} \
&\$4,400,000&\$128,000
\end{array}$
 
What amount should Blevert report as a liability at December 31, 2018?
A) $144,000
B) $124,000
C) $161,000
D) $181,000

Quizplus · Accepted Answer

To calculate the warranty liability at December 31, 2018, we need to estimate the warranty costs for sales made in 2017 and 2018 that have not yet been expended. For 2017 sales ($500,000), 1% ($5,000) is expended in 2017, 3% ($15,000) in 2018, and 5% ($25,000) in 2019. For 2018 sales ($1,600,000), 1% ($16,000) is expended in 2018, 3% ($48,000) in 2019, and 5% ($80,000) in 2020. By the end of 2018, $8,000 (2017) + $20,000 (2018) = $28,000 has been expended. The liability is the remaining estimated costs: $15,000 (2017) + $25,000 (2017) + $48,000 (2018) + $80,000 (2018) - $28,000 = $161,000.

During 2017, Blevert Co What Amount Should Blevert Report as a Liability at December