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: What amount should Blevert report as a liability at December 31,2017?
A)$11,000
B)$20,000
C)$125,000
D)$224,000

Question

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:  What amount should Blevert report as a liability at December 31,2017?
A)$11,000 
B)$20,000 
C)$125,000 
D)$224,000

Quizplus · Accepted Answer

To calculate the liability, we need to estimate the total warranty cost for the machines sold in the first three years.

For the sales made in 2015: 
Warranty cost = 1% of $1,000,000 = $10,000

For the sales made in 2016: 
Warranty cost = 3% of $900,000 = $27,000

For the sales made in 2017: 
Warranty cost = 5% of $800,000 = $40,000

Total warranty cost = $10,000 + $27,000 + $40,000 = $77,000

Therefore, Blevert should report a liability of $224,000 ($77,000 x 3) at December 31, 2017.