Question

Alvarado Company sells a machine for $8,050 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 540 machines in 2014, its first year of operation (warranty costs are incurred half in 2014 and half in 2015). As a result of product testing, the company estimates that the warranty cost is $395 per machine ($172 parts and $223 labor).

Assuming that actual warranty costs are incurred exactly as estimated, what is the balance in the warranty liability account at December 31, 2014?

Answer 1

The answer is: $106,650

Step-by-step explanation:

The total warranty cost for Alvarado Company are $395 per machine x 540 machines = $213,300.

Since only half of those warranty costs occur during 2014, then the warranty liability account for 2014 should equal half the total warranty costs = 50% x $213,300 = $106,650