Question

Puzzles company sells merchandise with a 1–year warranty. In year 1, sales consisted of 2,700 units. It is estimated that warranty repairs will average $18 per unit sold, and 40% of the repairs will be made in year 1 and 60% in year 2. In the income statement for year 1, Puzzles company should show warranty expense of:

1) $19,440
2) $29,160
3) $0
4) $48,600

Answer 1

The warranty expense for year 1 that Puzzles company should record on the income statement is $19,440, calculated by taking 40% of the total estimated warranty cost.

The student asks how much warranty expense should be shown in the income statement for year 1 by Puzzles company. To calculate this, we need to consider the estimated cost of warranty repairs for each unit sold and the percentage of repairs anticipated to take place in year 1. Since the company sold 2,700 units and the estimated warranty repair cost per unit is $18, the total estimated warranty cost is 2,700 units × $18, which equals $48,600. However, only 40% of these repairs are expected to occur in year 1. Therefore, the warranty expense for year 1 is 40% of $48,600, which equals $19,440. Consequently, the correct warranty expense to record in the income statement for year 1 by Puzzles company is $19,440.