During 2015, Blevert Co. 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 1% of sales in the year of sale, 3% in the year after sale, and 5% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:

Sales Actual Warranty Expenditures

2015 $500,000 $6,000

2016 1,500,000 25,000

2017 2,000,000 105,000

$4,000,000 $136,000

What amount should Blevert report as a liability at December 31, 2017?

Question

Business

Denzel Ortega

3 February, 05:52

During 2015, Blevert Co. 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 1% of sales in the year of sale, 3% in the year after sale, and 5% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:

Sales Actual Warranty Expenditures

2015 $500,000 $6,000

2016 1,500,000 25,000

2017 2,000,000 105,000

$4,000,000 $136,000

What amount should Blevert report as a liability at December 31, 2017?

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Answers (1)

Know the Answer?

Melina Summers · Answer 1

The amount of $224,000 should Blevert report as a liability at December 31, 2017

Explanation:

For computing the liability amount, we have to do the following calculations which is shown below:

= (Total sales value over the three year * sum of estimated warranty cost percentage for three year) - total warranty expenditure

= {$4,000,000 * (1% + 3% + 5%) } - ($136,000)

= {$4,000,000 * 9%} - ($136,000)

= $360,000 - $136,000

= $224,000