Robertson Corp. uses the revenue approach to account for warranties. During 2020, the company sold $ 750,000 worth of products, all of which carried a two-year warranty (included in the price). It was estimated that 2% of the selling price represented the warranty portion, and that 40% of this related to 2020, and 60% to 2021. Assuming that Robertson incurred costs of $ 5.500 to service the warranties in 2021, what is the net warranty revenue (revenue minus warranty costs) for 2021?

Question

Quizplus · Accepted Answer

The net warranty revenue for 2021 is calculated by first determining the warranty revenue allocated to 2021 and then subtracting the actual warranty costs incurred in 2021. The total warranty portion is 2% of $750,000, which equals $15,000. Of this, 60% is allocated to 2021, amounting to $9,000. Subtracting the actual costs of $5,500 from this gives a net warranty revenue of $3,500 for 2021.