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The unit selling price of a new entity's product is US $10,000. The buyers are provided with a 2-year warranty that is expected to cost the entity US $250 per unit in the year of the sale and US $750 per unit in the year following the sale. The entity sold 80 units in the first year of operation and 100 units in the second year. Actual payments for warranty claims were US $10,000 and US $65,000 in years one and two, respectively. The amount charged to warranty expense during the second year of operation is:
A. US $65,000
B. US $25,000
C. US $100,000
D. US $85,000
Answer: C
Explanation:
Under the accrual method, the total estimated warranty costs are charged to operating expense in the year of sale. The total estimated warranty cost per unit is US $1,000$250 +$750). In year two, 100 units were sold, so the warranty expense recognized is US $100,000.
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