Shear Company Sells Computer Equipment with a 2-Year Warranty

question 95

Multiple Choice

Shear Company sells computer equipment with a 2-year warranty. Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year. In 2012, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2012. What amount should the warranty expense for 2012 be?

• A)$18,000
• B)$36,000
• C)$54,000
• D)$250,000

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Definitions:

Compounded Daily

Refers to the process where interest earned is added to the principal daily, allowing the investment to grow at an accelerated rate due to the effects of compounding.

EAR

Effective Annual Rate, the interest rate on an investment or loan that considers compounding within the year.

Compounded Quarterly

A method of calculating interest where the interest earned over a quarter is added to the principal sum, and the next quarter's interest is calculated over the new principal.

Effective Annual Rate

The interest rate on an investment or loan on an annual basis, taking compounding into account.