Reference no: EM132684145

Question - Lemur Limited offers warranties on its products, undertaking to repair or replace any defective units for two years following the date of purchase. During 2020, Lemur Limited had sales of $5,000,000 of products to which these warranties applied. It was expected that the costs of servicing the warranties would amount to 3% of sales revenues from these products. Any repair work is performed by an outside contractor who is paid based on the time and materials incurred in the repairs. Replacements are taken from Lemur Limited's inventory.

At December 31, 2019, the warranty provision on the balance sheet was $150,000. The total charges from the outside contractor for work done in 2020 amounted to $120,000. In addition, units from inventory used to replace defective units under the warranty had a cost of $40,000 (and a selling price of $60,000).

Required -

i) What should the company's warranty provision be at the end of 2020?

ii) How much warranty expense should the company record for 2020?