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General Accounting Discussions: warranty liability

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    • CommentAuthorbelavia
    • CommentTimeApr 13th 2007
     
    Can someone please assist me in this question. The right answer is 90,000, but i can't see how that is possible.

    In the current year, a company commenced sales of a new product line. The company offers a 5-year warranty on the product. The estimated warranty costs as a percentage of sales by year are: First year of warranty 1% Second year of warranty 2% Third year of warranty 3% Fourth year of warranty 2% Fifth year of warranty 1% The company sold $1,000,000 of the new product in the current year with actual warranty expenditures for the year totalling $40,000. What was the estimated warranty liability on the company's books at the end of the current year?
    • CommentAuthorAbusamak
    • CommentTimeApr 14th 2007
     
    hello,
    it was very simple
    look,
    1+2+3+2+1% =9%
    1,000,000* 9%= 90,000$
    when u establesh a warranty liabilites:
    Dr. Warranty expense 90,000
    Cr. Warranty liabilites 90,000

    when u actually spend to warranty:
    Dr. Warranty libilites 40,000
    Cr. ripier part, cash.... 40,000

    this warranty spicfic to current year.
    good luck
    • CommentAuthorbelavia
    • CommentTimeApr 15th 2007
     
    So then it should be 50,000 at year end, not 90,000.

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