Amster Corp. produces and sells a single product that requires considerable servicing and adjustment during the first two years after sale. The company offers a warranty for two years covering most service requirements. The product’s price ranges from $ 900 to $ 1,200, depending on the particular model produced. Warranty work costs $ 100 per product, regardless of the model. This amount has been quite stable for several years. Most of the warranty work occurs between the 6th and the 18th month after sale. The company’s sales have been expanding, from approximately 9,000 units in 2009 to approximately 12,000 units in 2014.
Required:
How should Amster Corp. account for warranty costs, and how should the information be reported on its financial statements?