Question

Greenbaum Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $20,000 (40%) and $30,000 (60%); Year 2: $30,000 (70%); $20,000 (30%).The company's effective interest rate is 5%. Calculate the estimated warranty liability using the expected cash flow method.

Answer 1

Answer:

$49,252

Explanation:

Calculation to the estimated warranty liability using the expected cash flow method.

Estimated warranty liability =[($20,000 x .4)+($30,000 x .6) x 0.95238]+ [($30,000 x .7)+($20,000x .3) x 0.90703]

Estimated warranty liability =[($8,000+$18,000)×0.95238]+[($21,000+$6,000)×0.90703

Estimated warranty liability =($26,000×0.95238)+($27,000×0.90703)

Estimated warranty liability =$24,762+$24,490

Estimated warranty liability =$49,252

Therefore the estimated warranty liability using the expected cash flow method is $49,252