Tenuous Products provides a two-year warranty for repairs and services of its products. The firm has been operating for four years, and each year’s warranty expense has been estimated at 5% of product sales. A summary of warranty expenses and actual warranty costs is provided below.

Product Warranty Expense Warranty Year Sales (5% of sales)Expenditures 1 $ 10,000,000 $ 500,000 $ 120,000 2 30,000,000 1,500,000 840,000 3 60,000,000 3,000,000 2,160,000 4 90,000,000 4,500,000 3,960,000

$190,000,000 $9,500,000 $7,080,000 Required

a. Determine the Estimated Warranty Obligations balance to be reported on the balance sheet at the end of each year. Does the assumption that warranty expenses will average about 5% of sales appear to be justified?

b. Tim Plistic, general manager of Tenuous Products, makes the following observation upon seeing your response to part a: “Clearly we are too conservative in estimating our warranty expenses. Every year we are estimating greater expenses than we are actually incurring, and this creates an everincreasing overstatement of our warranty obligations.” Comment on this inference.

c. After further inquiry among the factory service personnel, you learn that products sold in a given year are likely to require about 20% of their warranty repairs in the year of sale, and the remaining 80% of their repairs in the year after the sale. How does this information affect your assessment of the adequacy of Tenuous Products’reported liability for warranty expenses as of the end of the fourth year?

d. Based on your analysis in part

c, what is your estimate of the amount of warranty expense that should be r?