Question

During Year 3, Rex Co. introduced a new product carrying a 2-year assurance-type warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale. Sales and actual warranty expenditures for year ended December 31, Year 3 and Year 4, are as follows:
Year Sales Actual Warranty Expenditures

2008 $250,000 $2,250
2009 250,000 7,500
Total $500,000 $9,750

What amount should Gum report as estimated warranty liability on its December 31, 2009 balance sheet?

Answer 1

Answer:

the amount that should reported as the estimated liability is $20,250

Explanation:

The computation of the amount that should reported as the estimated liability is as follows:

= Total sales × total percentage - total actual warranty expenditure

= $500,000 × 6% - $9,750

= $30,000 - $9,750

= $20,250

Hence, the amount that should reported as the estimated liability is $20,250