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During 2019, Waterway Industries introduced a new line of machines that carry a three-year warranty against manufacturer's defects
During 2019, Waterway Industries 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 $1,607,000 $41,000
2020 $2,495,000 $67000
2021 $2,100,000 $133,000
Total $6,202,000 $241,000
What amount should Waterway report as a liability at December 31, 2021?
$68720
$317180
$84000
$0
Expert Solution
Computation of Amount that Waterway should report as a liability at December 31, 2021:
Total sales for 3 years = $6,202,000
Total expected expense = 2%+3%+4% = 9%
Total expense to be recognized for 3 years = $6,202,000* 9% = $558,180
Actual warranty expenditure = $241,000
Liability at December 31,2021 = $558,180 - $241,000 = $317,180
So, the correct option is 2nd "$317,180". Amount that Waterway should report as a liability at December 31, 2021 is $317,180.
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