Question
Summer Inc., an accrual-method C corporation, is in the business of providing swimming lessons. This year, Summer Inc. expanded its operations and began selling swimwear.
Summer Inc., an accrual-method C corporation, is in the business of providing swimming lessons. This year, Summer Inc. expanded its operations and began selling swimwear. Summer Inc. offers a lifetime warranty on all swimwear sold.
This year, Summer Inc. sold $100,000,000 worth of swimwear. Summer Inc. accrued a warranty reserve of 2% ($2,000,000) for the expected future cost of providing warranty services on the swimwear. This year, Summer Inc. incurred $100,000 in warranty expenses to provide replacement swimwear for customers under the terms of the warranty. Summer Inc. estimates that the remaining $1,900,000 in warranty expenses related to swimwear sold this year will not be incurred for another couple of years.
What amount of warranty expense can Summer Inc. deduct in the current year?
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