Question

Alan’s Lawn Equipment sells high-quality lawn mowers and offers a 3-year warranty on all new lawn mowers sold. In 2020, Alan sold $289,600 of new specialty mowers for golf greens for which Alan’s service department does not have the equipment to do the service. Alan has entered into an agreement with Mower Mavens to provide all warranty service on the special mowers sold in 2020. Alan wishes to measure the fair value of the agreement to determine the warranty liability for sales made in 2020. The controller for Alan’s Lawn Equipment estimates the following expected warranty cash outflows associated with the mowers sold in 2020.

Year		Cash Flow Estimate			Probability Assessment
2021		$2,400			20%
		3,910			60%
		5,010			20%
2022		$2,800			30%
		4,960			50%
		5,450			20%
2023		$3,830			30%
		5,410			40%
		6,750			30%

Using expected cash flow and present value techniques, determine the value of the warranty liability for the 2020 sales. Use an annual discount rate of 4%. Assume all cash flows occur at the end of the year. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

The value of the warranty liability for the 2020 sales

$

Answer 1