Exhibit 9-4
During 2016, the Thomas Company began selling a new type of machine that carries a two-year assurance-type warranty against all defects. Based on past industry and company experience, estimated warranty costs should total
$2,000 per machine sold. During 2016, sales and actual warranty expenditures were $4,000,000 80 machines) and
$44,000, respectively. Thomas uses the GAAP approach of accruing warranty expense and the related liability) in the year of the sale.
-Refer to Exhibit 9-4. What amount should Thomas report as its warranty expense for 2016?
A) $0
B) $ 44,000
C) $160,000
D) $320,000

Question

Quizplus · Accepted Answer

The warranty expense for 2016 should be $160,000, calculated as $2,000 estimated cost per machine sold times 80 machines sold during the year. This approach aligns with GAAP, which requires accruing the estimated warranty expense in the year of the sale.

Exhibit 9-4 During 2016, the Thomas Company Began Selling a New Type