Question

Kohl Co. provides warranties for many of its products. The January 1, 2016 balance of Estimated Warranty Liability account was $35200. Based on an analysis of warranty claims during the past several years, this year's warranty provision was established at 0.4% of sales. During 2016 the actual cost of servicing products was under warranty was $15600 and sales were $3,600,000.
a) What amount of Warranty Expense will appear on Kohl Co's income statement for the year end December 31, 2016?
b) What amount will be reported in the Estimated Warranty Liability account on the December 31, 2016, balance sheet?

Answer 1

Answer:

a. $14,400, b. $34,000

Explanation:

a. Sales = $3,600,000

Warranty Provision = 0.4%

Warranty Expense = Sales * Warranty Provision

Warranty Expense = $3,600,000 * 0.4%

Warranty Expense = $14,400

b. Balance as of January 31, 2016 = $35,200

Warranty Expense = $14,400

Actual Cost of Servicing Products = $15,600

Estimated Warranty Liability = Balance as of January 31, 2016 + Warranty Expense - Actual Cost of Servicing Products

Estimated Warranty Liability = $35,200 + $14,400 - $15,600

Estimated Warranty Liability = $34,000