Question

During Year 1, Fox Co. 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, Year 1 and Year 2, are as follows: Actual Sales - Warranty Expenditures Year 1 - $ 150,000 - $ 2,250 Year 2 - 250,000 - 7,500 $ 400,000 - $ 9,750 What amount should Fox report as estimated warranty liability in its December 31, Year 2, balance sheet?a. $ 2,500

b. $ 4,250
c. $11,250
d. $14,250

Answer 1

D) $14,250

Step-by-step explanation:

In order to determine the total warranty liability that Fox must report in its December 31, 2014, balance sheet, we must multiply the total sales for both 2013 and 2014 by the estimated warranty expenses and then subtract the incurred warranty expenses:

• total sales during 2013 and 2014 = $150,000 + $250,000 = $400,000
• estimated warranty expenses = 2% + 4% = 6%
• incurred warranty expenses = $2,250 + $7,500 = $9,750

warranty liability = ($400,000 x 6%) - $9,750 = $24,000 - $9,750 = $14,250