Question

Puzzles Company sells merchandise with a one-year warranty. In Year 1, sales consisted of 3,600 units. It is estimated that warranty repairs will average $15 per unit sold, and 40% of the repairs will be made in Year 1 and 60% in Year 2. In the income statement for Year 1, Puzzles Company should show warranty expense of
a.$0.
b.$32,400.
c.$54,000.
d.$21,600.

Answer 1

Answer:

c.$54,000.

Explanation:

Warranty expenses should always be recognized in the same period as the products warranted were sold, regardless of when the repairs will be made. Therefore, the warranty expense for Puzzles Company is simply the number of units sold multiplied by the average repair cost per unit:

$WE = 3,600* \ 15\\WE= \ 54,000$