Question

# During 2020, in its first year of operations, Praet Co. introduced a new line of machines...

During 2020, in its first year of operations, Praet Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s 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 6% in the second year after sale. Sales were \$3,600,000, \$4,500,000 and \$5,200,000 in 2020, 2021 and 2022, respectively. Actual warranty expenditures were \$112,000, \$273,000 and \$302,000 in 2020, 2021 and 2022, respectively. How much is the total warranty expense recognized by Praet during 2020, 2021 and 2022?

Multiple Choice

• \$1,463,000

• \$89,000

• \$776,000

• \$725,000

 2020 2021 2022 Total Sales 3,600,000 4,500,000 5,200,000 Warranty expense for current year sales 3,600,000 x 2% = 72,000 4,500,000 x 2% = 90,000 5,200,000 x 2% = 104,000 Warranty expense for previous year sales 0 3,600,000 x 3% = 108,000 4,500,000 x 3% = 135,000 Warranty expense for 2 year ago sales 0 0 3,600,000 x 6% = 216,000 Total 72,000 198,000 455,000 \$725,000

Total warranty expense recognized by Praet during 2020, 2021 and 2022 = \$725,000

Fourth option is the correct option

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