Computer Inc. sells equipment with a 3-year warranty. Prior experience indicates that costs for warranty repairs average 3% in the first year, 2% in the second year and 1% in the third year. In 2020, Computer Inc. had sales of $800,000. It paid $20,000 for materials and labour to make warranty-related repairs in 2020. What amount will be recorded as warranty expense in 2020?
A)$20,000
B)$24,000
C)$28,000
D)$48,000

Question

Quizplus · Accepted Answer

The warranty expense is calculated based on the estimated costs over the warranty period. For $800,000 in sales, the estimated warranty costs are 3% for the first year, 2% for the second year, and 1% for the third year. This totals to 6% of $800,000, which is $48,000.