7. A few years ago, Flow Corporation introduced a new product carrying a two-yea
ID: 2559354 • Letter: 7
Question
7. A few years ago, Flow Corporation introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 1% within the first 12 months following the sale and 4% in the second i 2 months following the sale. Sales and actual warranty expenditures for the years ended December 31, 1991 are $250,000 and $6,500 respectively What amount should be reported as warranty expense for the year ended 12/31/91? A. $12,500 B. $6,000 C. $6,500 D. $2,500 E. None of the above 8. A few years ago, Baker Corporation introduced a new product carrying a two-year warranty against defects. The total future warranty costs are estimated to be 5% ofsales. Based on past history and industry averages, filed claims are expected to be twice as common in the last twelve months of the contract than in the first twelve months. At the beginning of 1991 Baker had a $25,000 balance in its warranty obligation account representing the estimated cost of un filed warranty claims from sales made in 1989 &1990. Sales for the year ended December 31, 1991 were $400,000 and during 1991 the company incurred $15,000 of cost servicing actual claims filed during 1991. What amount should be reported as warranty expense for the year ended 12/31/91? A. $30,000 B. $5,000 C. $25,000 D. $15,000 E. $20,000Explanation / Answer
7. Flow Corporation
Answer: Option A. $12,500
According to the matching principle, entire warranty expense pertaining to the sales made during the year will be recorded. Hence warranty expense recorded for the year ended 12/31/91 = $250000 x 5% = $12,500.
The actual warranty expenditure of $6,500 will be debited to the warranty liability account and will not affect the warranty expense account for the year.
8. Baker Corporation
Answer: Option E. $20,000
Warranty expense for year ended 12/31/91 = $400,000 x 5% = $20,000
Entire warranty expense pertaining to the sales made in 1991 will be recorded in 1991 itself which will be $20,000.
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