Cool Sound Corporation manufactures a line of amplifiers that carry a three-year warranty against defects. Based on experience, the estimated warranty costs related to dollar sales are as follows: first year after sale-2% of sales; second year after sale-3% of sales; and third year after sale-4% of sales. Sales and actual warranty expenditures for the first three years of business were:
Sales ............Warranty Expenditures
2012 ....... $ 810,000 ........................... $ 6,500
2013 ....... 1,070,000 ........................... 17,200
2014 ...... 1,036,000 ............................ 62,000
Instructions
(a) Calculate the amount that Cool Sound Corporation should report as warranty expense on its 2014 income statement and as a warranty liability on its December 31, 2014 statement of financial position. Assume that all sales are made evenly throughout each year and that warranty expenditures are also evenly spaced according to the rates above.
(b) Assume that Cool Sound's warranty expenditures in the first year after sale end up being 4% of sales, which is twice as much as was forecast. How would management account for this change?