Question

the chair company provides a 120-day parts-and-labor warranty on all merchandise it sells. the chair company estimates the warranty expense for the current period to be $2,650. during the period a customer returned a product that cost $1,830 to repair.

Answer 1

The Chair Company must deduct the actual repair cost of $1,830 from the estimated warranty expense of $2,650. This matches actual expenses with the estimated costs and is a practice aligned with the accrual accounting principle.

Step-by-step explanation:

The scenario involves a business accounting principle known as warranty expense estimation. The Chair Company estimates warranty expenses to be $2,650 for a particular period. Warranty expenses are projected costs that a company expects to incur in order to repair or replace products under warranty. When a customer returns a product within the warranty period, which in this case costs $1,830 to repair, this expense is applied against the previously estimated warranty reserve. Recording such expenses allows for the matching of revenues with expenses in the period in which they are incurred, aligning with the accrual basis of accounting.

For this specific case, the repair cost of $1,830 is deducted from the warranty expense reserve that was estimated at $2,650. If actual costs consistently exceed estimated costs, it suggests that the company may need to adjust its warranty cost estimates for future periods.