Inline Incorporated manufactures skates and equipment for in-line skating. The c
ID: 2724288 • Letter: I
Question
Inline Incorporated manufactures skates and equipment for in-line skating. The company offers a one-year warranty on all products. During 2012, the company recorded net sales of $3,887.4 million. Historically, about 3% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 60% of retail value. Assume that at the start of the year Inline’s balance sheet included an accrued warranty liability of $18.9 million and at the end of the year, the accrued warranty liability balance was $14.0 million.
a. How should Inline account for warranty claims?
b. Calculate Inline’s warranty expense for 2012.
c. How much did Inline pay during the year to repair and or replace goods under warranty?
Explanation / Answer
a)The company shall account for warranty at time of sale as the liability arises at point of sale only so he should estimated the amount of liability and accordingly make provision for it.
b)Warranty expense = 3887.4 * .03 = 116.622 million
c)Amount paid = Beginning liabilty +accrued during the year - balance at end
= 18.9 + 116.622 - 14
= $ 121.522 million