Question

At the beginning of 2018, Angel Corporation began offering a two-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2018 were $219 million. Fifteen percent of the units sold were returned in 2018 and repaired or replaced at a cost of $4.70 million.

The amount of warranty expense on Angel's 2018 income statement is?

Answer 1

Angel Corporation's warranty expense recorded on the 2018 income statement should be the expected cost, calculated as 4% of net sales, which amounts to $8.76 million, despite the actual repair costs incurred being $4.70 million.

Step-by-step explanation:

The student is asking how to calculate the warranty expense that should be reported on Angel Corporation's 2018 income statement. Because Angel Corporation expects the warranty program to cost 4% of net sales, we can determine the expected warranty expense by applying the 4% rate to the net sales figure.

To calculate the warranty expense for 2018:

1. Calculate the expected warranty expense by multiplying the net sales ($219 million) by the expected warranty cost percentage (4%), which equals $8.76 million.
2. The actual cost incurred in 2018 for warranty repairs was $4.70 million.
3. However, accounting standards require that the expense recorded should be based on the estimated costs (expected warranty expense), not the actual costs incurred.

Therefore, the amount of warranty expense recorded on Angel Corporation's 2018 income statement would be the expected $8.76 million.