Kim Company sells 2,000 units of its product for $500 each in 2014. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $100 per unit. In 2014, warranty contracts are honoured on 40 units for a total cost of $4,000.
-What amount should Kim Company accrue on December 31, 2014 for estimated warranty expense?
A) $6,000
B) $4,000
C) $2,000
D) $30,000

Question

Quizplus · Accepted Answer

Kim Company should accrue $6,000 for estimated warranty expense, calculated as 2,000 units * 3% defect rate * $100 repair cost per unit.

Kim Company Sells 2,000 Units of Its Product for $500