Albion Company sells merchandise with a one year warranty. In 2013, sales consisted of 2,500 units. It is estimated that warranty repairs will average $20 per unit sold, and 30% of the repairs will be made in 2013 and 70% in 2014. In the 2013 income statement, Albion should show warranty expense of:

Question

Quizplus · Accepted Answer

The warranty expense for 2013 should be based on the total estimated cost of repairs for all units sold in that year. With 2,500 units sold and an estimated repair cost of $20 per unit, the total estimated warranty expense is 2,500 units * $20/unit = $50,000. This entire amount should be recognized as an expense in 2013, regardless of when the repairs are actually made.

Albion Company Sells Merchandise with a One Year Warranty