Question

During 2019, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method)

Sales Actual Warranty Expenditures
2019 $1600000 $39000
2020 2500000 65000
2021 2100000 135000
$6200000 $239000

What amount should Rao report as a liability at December 31, 2018?

a. $0
b. $71,000
c. $84,000
d. $319,000

Answer 1

The amount that of money that Rao has to report as a liability should be $319000.

The total amount from the sales

$1600000+ 2500000+2100000

= $6200000

Actual warranty expenditure

39000+ 135000+ 65000

= $239000

Solution for the liability report

$6200000(0.04+0.02+0.03)

= 558000

558000 - 239000

= $319,000

From the calculation that I have done above, we can conclude that the amount that Rao has to report as a liability is  $319,000.

Read more on liabilities here:https://brainly.com/question/24534918