Question

East Corp. manufactures stereo systems that carry a two-year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period. During 2005, stereo system sales totaled $3,000,000, and warranty costs of $67,500 were incurred. In its income statement for the year ended December 31, 2005, East should report warranty expense of:

A. $52,500

B. $60,000

C. $67,500

D. $120,000

Answer 1

$52,500

Step-by-step explanation:

Warranty cost are the cost associated with the repair or replacement of a product in case it does not perform as intended after purchase.

It is debited to the warranty expenses account and credited to the warranty liability account.

Total sales for the year - $3,000,000

Warranty estimate basis - 4%

Estimated warranty - 3,000,000 * 4% = $120,000

Warranty cost incurred = $67,500

Balance to be recorded for the year = 120,000 -67,500

$52,500