Question

A company has a selling price of $1,850 each for its printers. Each printer has a 2 year warranty that covers replacement of defective parts. It is estimated that 3% of all printers sold will be returned under the warranty at an average cost of $151 each. During November, the company sold 31,000 printers, and 410 printers were serviced under the warranty at a total cost of $56,000. The balance in the Estimated Warranty Liability account at November 1 was $29,500. What is the company's warranty expense for the month of November?

Multiple Choice

a. $26,500

b. $61,910

c. $70,215

d. $56,000

e. $140,430

Answer 1

The Answer is Option E. $140,430

Explanation;

A company estimated 3% of the printers sold will be returned under the warranty of 2 Years at an average cost of $151.00 each.

The company sold 31000 printers in the Month of November. So, at the time of sale (in the month of November) the company estimated 3% of 31000 printers i.e 930 Printers will be returned under warranty of 2 Years at a cost of $151.00 each. So, the company incurred the warranty cost/expense in month of November is;

930 Printers X $151.00 = $ 140430.00

Irrespective of the fact that the company only received 410 Printers for service under 2 Year warranty yet, but it could be possible that remaining or more printers can be returned for service any time in future under the warranty period of 2 Years. However, as at the time of selling the company estimated 3% of the printers sold would be returned for service at the cost/expense of $151.00 each. Therefore, as the company sold 31000 Printers in the month of November, so the 3% of 31000 printers i.e 930 Printers estimated to be returned at the cost/expense of $151.00 each, so the total expense/cost incurred for the month of November is $140,430.00.

No impact of balance of $29,500.00 on 1^st November as the question required the expense for the month of November.

Also, no impact of how much cost company already incurred to service 410 Printers i.e $56,000.00 which is also less than the company estimated i.e (410 Printers X $151.00 = $61,910.00), but the company had to incur the full expense/cost for estimated 3% of all printers sold in November irrespective how many printers they received for service until November.