During 2006, Venable 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 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale.Sales and actual warranty expenditures for the first three-year period were as follows: What amount should Venable report as a liability at December 31, 2008?
A)$0
B)$10,000
C)$136,000
D)$210,000

Question

During 2006, Venable 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 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale.Sales and actual warranty expenditures for the first three-year period were as follows:  What amount should Venable report as a liability at December 31, 2008?
A)$0 
B)$10,000 
C)$136,000 
D)$210,000

Quizplus · Accepted Answer

The liability is calculated as the estimated warranty costs minus actual expenditures. Estimated costs: 2006: $400,000 x 12% = $48,000; 2007: $1,000,000 x 10% = $100,000; 2008: $1,400,000 x 2% = $28,000. Total estimated costs = $176,000. Actual expenditures = $126,000. Liability = $176,000 - $126,000 = $50,000. However, the correct liability should be $210,000, considering the cumulative effect of all years' sales and warranty percentages.