Question

During 2016, Rao 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 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Sales Actual Warranty Expenditures 2016 $1,600,000 $ 39,000 2017 2,500,000 65,000 2018 2,100,000 135,000 $6,200,000 $239,000 What amount should Rao report as a liability at December 31, 2018? Group of answer choices $0 $319,000 $71,000 $84,000

Answer 1

$319,000

Step-by-step explanation:

The computation of the liability is shown below:

= Total expenses in three year - actual warranty expenditure

where,

Total expenses in three years = Total sales × total percentage of sales

= $6,200,000 × 9%

= $558,000

And, the actual warranty expenditure is $239,000

Now put these values to the above formula

So, the value would equal to

= $558,000 - $239,000

= $319,000