Question

During 2020, Desert Company introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31, 2020 and 2021 are as follows: Sales Actual Warranty Expenditures 2020 $800,000 $12,000 2021 $1,000,000 $35,000 TOTAL $1,800,000 $47,000 What is the amount of estimated warranty liability Desert should report at December 31, 2021?

Answer 1

Answer:

                 Estimated Warranty Liability December 31, 2020

                                                 Debit                                                 Credit

                                                                  Beginning balance          $0

Actual Warranty Expenditure $12,000    Estimated total cost of    $48,000

                                                                  Warranty $800,000*6%

Ending Balance                      $36,000

                                                $48,000                                             $48,000

                Estimated Warranty Liability December 31, 2020

                                                 Debit                                                 Credit

2021  Servicing Expense       $35,000    Beginning balance        $36,000

Ending Balance                      $61,000     Estimated total cost of  $60,000

                                                                  Warranty $1,000,000*6%

                                                $96,000                                             $96,000

So, the company should report an estimated warranty liability of $61,000 at Dec 31, 2021