Problem - During 2016, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturerâs defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method)
Sales Actual Warranty Expenditures
2016 $ 1,600,000 $ 39,000
2017 2,500,000 65,000
2018 2,100,000 135,000
$6,200,000 $239,000
What amount should Rao report as a liability at December 31, 2018?
a. $0
b. $71,000
c. $84,000
d. $319,000