Fail-Safe Computer Inc. sells equipment with a 2-year warranty. Prior experience indicates that costs for warranty repairs average 3% in the first year, and 2% in the second year. Sales were $300,000 and $400,000 in fiscal 2012 and 2013 respectively. It paid $5,000 for materials and labour to make warranty-related repairs in 2012. What amount will be recorded as warranty expense in 2012?
A)$15,000
B)$20,000
C)$21,000
D)$26,000

Question

Quizplus · Accepted Answer

The warranty expense for 2012 is calculated as 3% of the 2012 sales ($300,000), which equals $9,000, plus 2% of the 2013 sales ($400,000), which equals $8,000. The total warranty expense is $9,000 + $8,000 = $17,000. However, since the question asks for the 2012 expense, only the $9,000 is relevant, but the closest option is $15,000, which accounts for the $5,000 already paid.