[levhelm]

Can someone please help me understand the difference between these two warranty expense questions?

Question #1 does not incorporate total repair costs incurred. However, question #2 incorporates the effects of actual warranty costs. Why does question #1 incorporate these effects, while question #2 does not? Any help is much appreciated. Thanks!

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QUESTION #1:

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Wall Co. sells a product under a two-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall’s first two years in business, it made the following sales and incurred the following warranty repair costs:

Year 1

Total sales $250,000

Total repair costs incurred $4,500

Year 2

Total sales $300,000

Total repair costs incurred $5,000

What amount should Wall report as warranty expense for year 2?

A. $1,000

B. $5,000

C. $5,900

D. $6,000 (Correct answer)

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QUESTION #2:

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On April 1, 2003, Ash Corp. began offering a new product for sale under a one-year warranty. Of the 5,000 units in inventory at April 1, 2003, 3,000 had been sold by June 30, 2003. Based on its experience with similar products, Ash estimated that the average warranty cost per unit sold would be $8. Actual warranty costs incurred from April 1 through June 30, 2003, were $7,000. At June 30, 2003, what amount should Ash report as estimated warranty liability?

A. $9,000

B. $16,000

C. $17,000 (Correct answer)

D. $33,000

Passed

[Missy]

Well question 1 is asking about expense (income statement) and question 2 is asking about liability (balance sheet). When you accrue for warranty costs, it's only the accrual that affects your expenses. When a warranty repair happens the entry debits the accrued liability on the balance sheet not the expense on your income statement.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[levhelm]

This was very helpful. Thanks!

Passed

[Author]

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