Lager Company sells merchandise with a one year warranty. In 2013, sales consisted of 1,600 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2013 and 70% in 2014. In the 2013 income statement, Lager should show warranty expense of

Question

Quizplus · Accepted Answer

The warranty expense for 2013 should be based on the total estimated cost of repairs for all units sold in that year. With 1,600 units sold and an estimated repair cost of $10 per unit, the total estimated warranty expense is 1,600 units * $10/unit = $16,000. This full amount is recognized as an expense in 2013, regardless of when the repairs are actually made.

Lager Company Sells Merchandise with a One Year Warranty