Petula's business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2018, heat pump sales are $400,000. Actual warranty expenses paid in 2018 are $40,000.
a. Determine the amount of the warranty expense deduction for 2018 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?

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The Answer of Petula's business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2018, heat pump sales are $400,000. Actual warranty expenses paid in 2018 are $40,000.
a. Determine the amount of the warranty expense deduction for 2018 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?

Petula's Business Sells Heat Pumps Which Have a One-Year Warranty