Question

Question 21 A manufacturing company sells motorcycles with a five-year warranty against manufacturer’s defects. The manufacturer expects that 0% of the motorcycles sold will prove to be defective in the first year after they are sold, 1% will prove to be defective in the second year, 2% will prove to be defective in the third and fourth years, and 3% will prove to be defective in the fifth year. The average cost to repair or replace a defective unit under the warranty is expected to be $50. The company’s sales and warranty costs incurred in its first five years were as follows: Units Sold Actual Costs of Repairs and Replacements under the Warranty Plan 2016 7,400 $600 2017 8,200 $17,000 2018 11,500 $33,200 2019 12,800 $23,400 2020 5,900 $12,000

Calculate the amount that should have appeared in the estimated Warranty Provision account at the end of 2018. Assume the balance in the Warranty Provision account was zero at the beginning of 2016. Estimated warranty provision account, Dec. 31, 2018 $

Calculate the amount of warranty expense that should have been recognized in 2019. Warranty expense $

Answer 1

(A) Calculation of estimated amount in the Warrant provision Account by the end of 2018:

From the above table, it is clear that the Warrant provision Account by 2018 end would be $11100+$4100=$15200

(B) Warrant expenses thar should have been recognized in 2019:-

Provision account total by the end of 2019=$18500+$12300+$5750

=$36550

The difference between Opening balance and Closing is written off as Warrant expenses and recognized in books of accounts

Warrant expense=(Opening Balance - Closing BAlance) of Provision Account

=36550-15200

= $ 21350