Problem:
The Athletic Accountant Company produces exercise equipment for accountants. Its main product, the Pencil-Pusher Push-Up Platform, is sold with a three-year warranty against defects. The company expects that 1% of the units sold will prove to be defective in the first year after they were sold, 2% will be prove defective in the second year, and 3% of the units sold will prove to be defective in the third year. The average cost to repair or replace a defective unit under the warranty is expected to be $50.
The company's sales and warranty costs incurred during its first three years were as follows:
Units sold Actual costs of repairs and replacements under the warranty plan
2006 9,000 units $ 5,000
2007 12,000 units $ 16,000
2008 17,000 units $ 37,000
Q1. Calculate the amount that should have appeared in the warranty obligation (liability) account at the end of 2006.
Q2. Calculate the amount of warranty expense that should have been recognized in 2007.