Refer to the data given in Starter 11-3.
What amount of warranty expense will Patagonia Corporation report during 2014? Does the warranty expense for the year equal the year's cash payments for warranties? Which accounting principle or objective addresses this situation?
In Starter 11-3
Patagonia Corporation guarantees its snowmobiles for three years. Company experience indicates that warranty costs will be 3 percent of sales.
Assume that a Patagonia dealer made sales totalling $600,000 during 2014, its first year of operations. The company received cash for 30 percent of the sales and notes receivable for the remainder. Warranty payments totalled $9,000 during 2014.