The Athletic Accountant Company produces exercise equipment designed for accountants. Its main product, the Pencil-Pusher Push-Up Platform, is sold 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:

Required:
a. Calculate the amount that should have appeared in the warranty obligation (liability) account at the end of 2009.
b. Calculate the amount of warranty expense that should have been recognized in 2010.
c. Considering the costs incurred to the end of 2011, do you think the company's estimates regarding the warranty costs were too high, too low, or just about right? Explain your reasoning.

Transcribed Image Text:

2009 2010 2011 Units Sold 9,000 12,000 17,000 Actual Costs of Repairs and Replacements under the Warranty Plan 5,000 $16,000 $37,000