Question

During 2020, in its first year of operations, Praet 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 6% in the second year after sale. Sales were $3,600,000, $4,500,000 and $5,200,000 in 2020, 2021 and 2022, respectively. Actual warranty expenditures were $112,000, $273,000 and $302,000 in 2020, 2021 and 2022, respectively. How much is the total warranty expense recognized by Praet during 2020, 2021 and 2022?

Answer 1

$725,000

Step-by-step explanation:

The computation of the total amount of warranty expense is shown below:

Particulars 2020 2021 2022 Total

Sales 3,600,000 4,500,000 5,200,000

Add:

Warranty expense for current year sales

$72,000 $90,000 $104,000

(3,600,000 × 2%) (4,500,000 × 2%) (5,200,000 × 2% )

Add:

Warranty expense for previous year sales

0 $108,000 $135,000

( 3,600,000 × 3% (4,500,000 × 3%)

Add:

Warranty expense for 2 year ago sales

$0 $0 $216,000

(3,600,000 × 6%)

Total 72,000 198,000 455,000 $725,000

We simply added the expenses based on the given criteria in the question