Power Company sells merchandise with a one year warranty. In 2012, sales consisted of 1,600 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in 2012 and 70% in 2013. In the 2012 income statement, Power should show warranty expense of
A) $4,800
B) $11,200
C) $16,000
D) $0

Question

Quizplus · Accepted Answer

The estimated warranty repairs for 2012 are 30% of 1,600 units, which amounts to 480 units. The expense for warranty repairs in 2012 will be $10 x 480 units = $4,800. Additionally, the remaining 70% of the warranty repairs, or 1,120 units, will be made in 2013. Therefore, no warranty expense should be recognized in 2013 for these repairs. Thus, the total warranty expense that should be shown in the 2012 income statement is $4,800.

Power Company Sells Merchandise with a One Year Warranty