A manufacturing company sells its main product with a three-year warranty against defects. The company expects that 6% of the units sold will prove to be defective during the warranty period. Management expects warranty claims will be even over the three-year warranty period. 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 estimated Warranty Provision account at the end of 2018.

b. Calculate the amount of warranty expense that should have been recognized in 2019 and 2020.

c. Considering the costs incurred to the end of 2020, 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:

Actual Costs of Repairs and Replacements under the Warranty Plan Units Sold 9,000 12,000 17,000 2018 $ 5,000 2019 $16,000 2020 $37,000