Shear Company sells computer equipment with a 2-year warranty. Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year. In 2021, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2021. What amount should the warranty expense for 2021 be?
A)$18,000
B)$36,000
C)$54,000
D)$250,000

Question

Quizplus · Accepted Answer

The warranty expense for 2021 should include the cost of repairs made in 2021 and the estimated cost of repairs for future years. Since the warranty lasts for 2 years, the estimated cost for future years would be 1% of sales for the first year of the warranty period and 2% of sales for the second year of the warranty period.

Estimated cost for future years:
Year 1: 1% of $1,800,000 = $18,000
Year 2: 2% of $1,800,000 = $36,000

Total estimated cost for future years = $54,000

Therefore, the warranty expense for 2021 would be:
$250,000 (cost of repairs made in 2021) + $54,000 (estimated cost for future years) = $304,000

The best choice is C, $54,000.

Shear Company Sells Computer Equipment with a 2-Year Warranty