Question
Ultrasonic Sound Wave Ltd. manufactures a line of amplifiers that carry a three-year warranty against defects. Based on experience, the estimated warranty costs related to
Ultrasonic Sound Wave Ltd. 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 sale2% of sales; second year after sale3% of sales; and third year after sale4% of sales. Sales and actual warranty expenditures for the first three years of business were:
Year Sales Warranty Expenditures
2015 $810,000 $6,500
2016 1,070,000 17,200
2017 1,036,000 62,000
A) Calculate the amount that Ultrasonic Sound Wave Ltd. should report as warranty expense on its 2017 income statement and as a warranty liability on its December 31, 2017 statement of financial position using the assurance-type warranty (expense-basedapproach). 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 Ultrasonic Sound Wave 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?
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