Cameron Company sells 2,000 units of its product for $ 500 each in 2021. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $ 100 per unit. In 2021, warranty contracts are honoured on 40 units for a total cost of $ 4,000. What amount should Cameron Company record in 2021 for warranty expense?
A) $ 6,000
B) $ 4,000
C) $ 2,000
D) $ 30,000

Question

Quizplus · Accepted Answer

Cameron Company should record warranty expense based on the expected warranty costs. With 2,000 units sold and a 3% defect rate, 60 units are expected to be defective (2,000 x 0.03). At $100 per unit, the expected warranty cost is $6,000 (60 x $100).

Cameron Company Sells 2,000 Units of Its Product for