Refer to the data given in Short Exercise. What amount of warranty expense will Trekster USA report during 2010? Which accounting principle addresses this situation? Does the warranty expense for the year equal the year’s cash payments for warranties? Explain the relevant accounting principle as it applies to measuring warranty expense.
Trekster USA guarantees automobiles against defects for five years or 55,000 miles, whichever comes first. Suppose Trekster USA can expect warranty costs during the five-year period to add up to 6% of sales. Assume that Trekster USA dealer in Atlanta, Georgia, made sales of $483,000 during 2010. Trekster USA received cash for 30% of the sales and took notes receivable for the remainder. Payments to satisfy customer warranty claims totaled $19,000 during 2010.