[netfru2004]

During 2006, Watson introduced a new line of machines that carry a three-year warranty against manufacturer's defect. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after the sale. Sales and actual warranty expenditures for the first three-year period were as follows:

Sales Actual Warranty Expenditures
2006 $ 600,000 $ 9,000
2007 1,500,000 45,000
2008 2,100,000 135,000

What amount should Watson report as a liability at December 31, 2008?

[netfru2004]

sales $4,200,000 x .12 = $504,000 - $189,000 = $315,000

[morgaine300]

Have you had algebra and learned order of operations?

The math doesn't work this way. First, it's more complicated than what you're try to do, but let's say what you're trying to do is correct.

It would really be (600,000 x 2%) + (1,500,000 x 4%) + (2,100,000 x 6%) = answer

This is not the same as:
(600,000 + 1,500,000 + 2,100,000) * (2% + 4% + 6%) = answer

You see the difference?

Furthermore, it's a bit more complicated than that anyway. It's not 2% of the first year's sales, 4% of the next year's sales, etc. It's 2% of the first year's sales are expected to have warranty repairs during that same year, 4% of the first year's sales are expected to have warranty repairs next year, and 6% of the first year's sales are expected to have warranty repairs two years from now. In other words, the warranty repairs for each year's sales will spread over 3 years. Then you'd have to repeat the process for the second year's sales, etc.

To start you off, sales for 2006 is 600,000. Warranty repairs in 2006 will be 2% of 600,000. Warranty repairs for 2006's sales will in 2007 be 4% of 600,000. Warranty repairs for 2006's sales will in 2008 be 6% of 600,000. See -- you're spreading the repairs for the same year's sales over 3 years.

Then 2007 sales is 1,500,000. So 2% of that will be repairs in the same year, 2007. And 4% of that will be repairs in the next year, 2008. 6% would be in 2009, but you don't need to take it that far.

Etc.

See if you can work that out.