Homework SourseDuring Year One Company A and Company Z both sell 1000 comp
. During Year One, Company A and Company Z both sell 1,000 computers for $1,000 each in cash. Company A provides a one-year warranty to its customers for free. Company Z sells a one-year warranty to all of its customers for $50 each. Both companies expect 5 percent of the computers to break and cost $600 each to repair. In Year Two, both companies actually have 6 percent of these computers break. However, the required cost to fix each one was only $550.
a. In financial reporting for Year One, which company will report the highest amount of net
income? What will be the difference in the two reported amounts?
b. In financial reporting for Year Two, which company will report the highest amount of net
income? What will be the difference in the two reported amounts?
Solution
a. Year 1 earnings :
- $30000
b. Year 2 earnings :
-$33000
| Company A | Company Z | Difference of reported amounts | |
| Sales revenue | 1000*$1000 = $1,000,000 | 1000*$1000 = $1,000,000 | |
| Add: Service revenue | 0 | 1000*$50 = $50,000 | |
| Total revenue | $1,000,000 | $1,050,000 | |
| Less: cost of repair (on warranty) | 1000*5%*$600 = -$30000 | - $30000 | |
| Net income | $970,000 | $1,020,000 | $50000, which is the service revenue difference |
