A manufacturing company sells its main product with a three-year warranty against defects. The company expects that 1% of the units sold will prove to be defective in the first year after they are sold, 2% will prove to be defective in the second year, and 3% will prove to be defective in the third year. The average cost to repair or replace a defective unit under the warranty is expected to be $60. The company’s sales and warranty costs incurred in its first three years were as follows:
a. Calculate the amount that should have appeared in the estimated warranty provision account at the end of 2014.
b. Calculate the amount of warranty expense that should have been recognized in 2015.
c. Considering the costs incurred to the end of 2016, do you think the company’s estimates regarding the warranty costs were too high, too low, or just about right? Explain your reasoning.

  • CreatedJune 11, 2015
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