A manufacturing company sells motorcycles with a five-year warranty against manufacturer’s defects. The manufacturer expects that 0% of the motorcycles sold will prove to be defective in the first year after they are sold, 1% will prove to be defective in the second year, 2% will prove to be defective in the third and fourth years, and 3% will prove to be defective in the fifth year. The average cost to repair or replace a defective unit under the warranty is expected to be $40. The company’s sales and warranty costs incurred in its first five years were as follows:

Required

a. Calculate the amount that should have appeared in the estimated Warranty Provision account at the end of 2018. Assume the balance in the Warranty Provision account was zero at the beginning of 2016.

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

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.

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Actual Costs of Repairs and Replacements under the Warranty Plan $ 500 $16,000 Units Sold 7,000 2016 2017 2018 9,000 10,000 12,000 6,000 $30,000 2019 $24,000 $12,000 2020