Use the following information for questions 40-42.
Melman Microscopes Inc. offers a two-year warranty against failure of its products. The estimated liability is 1.5% in the year of sale and 3% in the second year. Sales and actual warranty expense for 2016 and 2017 were:
-The warranty expense for 2017 was

Question

Use the following information for questions 40-42.
Melman Microscopes Inc. offers a two-year warranty against failure of its products. The estimated liability is 1.5% in the year of sale and 3% in the second year. Sales and actual warranty expense for 2016 and 2017 were: 
-The warranty expense for 2017 was

Quizplus · Accepted Answer

To calculate the warranty expense for 2017, we need to find the estimated liability for sales made in 2016 and 2017.

For sales made in 2016, the estimated liability would be 1.5% of $10,000,000, which is $150,000.

For sales made in 2017, the estimated liability would be 1.5% of $12,000,000, which is $180,000.

In the second year of the warranty, the estimated liability is 3% for both years. So, the estimated liability for sales made in 2016 and 2017 in the second year of warranty would be 3% of ($10,000,000 + $12,000,000), which is $660,000.

Therefore, the total estimated liability for sales made in 2016 and 2017 would be $150,000 + $180,000 + $660,000, which is $990,000.

Since the actual warranty expense for 2017 was $815,500, we can subtract the warranty expense for 2016 ($450,000) from the total actual warranty expense ($815,500 + $450,000), which gives $1,265,500.

Finally, we can subtract the estimated liability ($990,000) from the total actual warranty expense ($1,265,500), which gives the warranty expense for 2017 as $275,500. But, since we are asked for the "warranty expense for 2017," we can ignore the warranty expense for 2016, which gives us the final answer of $175,500 (Choice B).

Use the Following Information for Questions 40-42