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 estimate the future warranty expenditures based on the remaining sales of Grinder Machinery's new line of machines.

Year 2013: 
Sales in 2013: $250,000 
Estimated warranty cost (4% of sales): $10,000

Year 2014: 
Sales in 2014: $300,000 
Estimated warranty cost (6% of sales): $18,000

Total estimated warranty costs for 2013 and 2014: 
$10,000 + $18,000 = $28,000

Actual warranty expenditures for 2013 and 2014: 
$0 + $5,625 = $5,625

Therefore, the liability at December 31, 2014 is:
$28,000 - $5,625 = $22,375

However, since we are asked to report the liability at December 31, 2014, we need to adjust for the warranty costs that Grinder Machinery has already recognized as expenses in 2012 and 2013.

Year 2012: 
Sales in 2012: $150,000 
Estimated warranty cost (2% of sales): $3,000 
Actual warranty expenditures for 2012: $0

Year 2013: 
Sales in 2013: $250,000 
Estimated warranty cost (4% of sales): $10,000 
Actual warranty expenditures for 2013: $0

Total estimated warranty costs for 2012 and 2013: 
$3,000 + $10,000 = $13,000

Actual warranty expenditures for 2012 and 2013: 
$0 + $5,625 = $5,625

Therefore, the liability at December 31, 2014 is:
$22,375 - $5,625 - $13,000= $3,750

Thus, the best choice is D.

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