Problem
Specialty Appliances and More, Inc. (SAM) has a three-year warranty on their solar refrigerators for defects. Warranty costs are estimated at 2% of sales in year one (the year of the sale), and 5% of sales in each of the following two years. The warranty expires at the end of the third year. Annual sales and actual warranty repair costs were as follows:
|
sales
|
Actual Warranty Cost
|
|
year 1
|
$275,000
|
$27,500
|
|
year 2
|
$350,000
|
$17,500
|
|
year 3
|
$425,000
|
$30,000
|
|
total
|
$1,050,000
|
$75,000
|
What amount should SAM record as warranty expense in the first three years?