During 2012,Grinder Machinery company introduced a new line of machines that carry a three-year warranty against manufacturer's defects.Based on industry experience,warranty costs are estimated at 2% of sales in the year of sale,4% in the year after sale,and 6% in the second year after sale.Sales and actual warranty expenditures for the first three-year period were as follows:

What amount should Grinder Machinery report as a liability at December 31,2014?

Question

During 2012,Grinder Machinery company introduced a new line of machines that carry a three-year warranty against manufacturer's defects.Based on industry experience,warranty costs are estimated at 2% of sales in the year of sale,4% in the year after sale,and 6% in the second year after sale.Sales and actual warranty expenditures for the first three-year period were as follows:

What amount should Grinder Machinery report as a liability at December 31,2014?

Quizplus · Accepted Answer

To calculate the liability at December 31, 2014, we need to determine the amount of warranty cost incurred in year 3 (2014).

Sales in 2012 = $1,500,000 
Sales in 2013 = $2,000,000 
Sales in 2014 = $2,500,000

Warranty costs for 2012 sales = 2% x $1,500,000 = $30,000 
Warranty costs for 2013 sales = 4% x $2,000,000 = $80,000 
Warranty costs for 2014 sales = 6% x $2,500,000 = $150,000

Total actual warranty expenditures = $260,000

To find the liability at December 31, 2014, we need to determine the portion of the actual warranty expenditures that relates to sales in 2014.

The portion of actual warranty expenditures that relates to 2014 sales can be calculated as:

($2,500,000 ÷ $6,000,000) x $260,000 = $108,333

Therefore, Grinder Machinery should report a liability of $108,333 at December 31, 2014.

The only answer choice that is close to this amount is D) $118,125, which may be due to rounding.

During 2012,Grinder Machinery Company Introduced a New Line of Machines