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7. The Pink Cadillac car dealership provides warranty work on all vehicles sold. The entityʼs past

experience has indicated the following:

-60% of cars sold in a year have zero defects

-25% of cars sold in a year have normal defects

-15% of cars sold in a year have significant defects.

It is estimated that a vehicle with normal defects will incur $3,000 in costs and a vehicle with

significant defects will incur $12,000 in costs.

During the current year, PC sold 80 vehicles and incurred $70,000 in actual costs. With an

opening balance of $40,000 in the warranty provision account, what would be the balance at

the end of the current year and how much warranty expense would be recognized during the

current year?

a) $174,000 and $204,000

b) $174,000 and $70,000

c) $204,000 and $204,000

d) $174,000 and $174,000

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Q: How do you estimate Warranty Expense and how often do you do the estimates?
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When scientists cannot obtain on exact numbers they often rely on?


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