Silver Cloud Company manufactures and sells computers for $2,000 each, with a two-year parts and labour warranty. Based on prior experience, the company expects, on average, to incur warranty costs equal to 5% of sales. The company reports the following sales and warranty cost information:
_____________________ Sales (units) __________ Actual Warranty Costs
2012 ........................ 500 ........................ $30,000
2013 ........................ 600 ........................ 46,000
2014 ........................ 525 ........................ 53,500
Instructions
(a) Calculate the warranty expense for each year.
(b) Calculate the warranty liability at the end of each year.