Petula's business sells heat pumps which have a oneyear warranty.Based on historical data,the warranty costs amount to 11% of sales.During 2014,heat pump sales are $400,000.Actual warranty expenses paid in 2014 are $40,000.
a.Determine the amount of the warranty expense deduction for 2014 if Petula's business uses the accrual method.
b.How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties which covered the second and third years of ownership?

Question

Petula's business sells heat pumps which have a one­year warranty.Based on historical data,the warranty costs amount to 11% of sales.During 2014,heat pump sales are $400,000.Actual warranty expenses paid in 2014 are $40,000.
a.Determine the amount of the warranty expense deduction for 2014 if Petula's business uses the accrual method.
b.How would your answer change if Petula used the cash method for extended warranties and the purchasers paid $25,000 for the warranties which covered the second and third years of ownership?

Quizplus · Accepted Answer

b.Petula would record gross income in 2014 of $425,000 ($400,000 + $25,000).The deduction for warranty expense would still be $40,000.

Petula's Business Sells Heat Pumps Which Have a One­year Warranty

Petula's Business Sells Heat Pumps Which Have a Oneyear Warranty