Question

At the beginning of 2022, Snowfall Inc. began offering a two-year warranty on its products. The warranty program was expected to cost Snowfall 4% of net sales. Net sales made under warranty in 2022 were $210 million. Fifteen percent of the units sold were returned in 2022 and repaired or replaced at a cost of $4.70 million. The amount of warranty expense on Snowfall's 2022 income statement is:

Answer 1

The warranty expense for Snowfall Inc. on the 2022 income statement is calculated as 4% of net sales, which equals $8.4 million. This figure is higher than the actual repair costs incurred, so $8.4 million is the expense reported.

Step-by-step explanation:

To calculate the warranty expense for Snowfall Inc.'s 2022 income statement, you have to take into account the expected cost of the warranty as a percentage of net sales. Since Snowfall anticipated that the warranty program would cost 4% of net sales, you multiplied the net sales ($210 million) by the warranty cost percentage (4%).

The calculation will look like this: $210 million x 0.04 = $8.4 million. This is the estimated warranty expense that Snowfall Inc. expected for the year. However, they also incurred actual warranty repair/replacement costs amounting to $4.70 million in 2022. The standard accounting practice typically recognizes the greater of the two figures—either the estimated expense based on sales or the actual repair/replacement costs incurred—as the warranty expense. In this case, since $8.4 million (estimated expense) is higher than $4.7 million (actual cost), $8.4 million would be reported as the warranty expense on the 2022 income statement.