Question

In 2016, Morton Co. sold 100 hot air balloons at $4,000 each. The balloons carry a 5-year warranty for defects. Morton estimates that repair costs will average 4% of the total selling price. The estimated warranty liability at the beginning of the year was $42,000. $11,000 in claims was actually incurred during the year to honor their warranty. What was the balance in the ending estimated warranty liability at the end of the year?

a. $42,000
b. $37,000
c. $47,000
d. $ 5,000

Answer 1

The end of year warranty liability for Morton Co. was calculated by adding the estimated repair cost liability from new sales to the beginning liability, and then subtracting the claims incurred. The ending balance was $47,000.

Step-by-step explanation:

To find the ending estimated warranty liability for Morton Co., we need to incorporate both the beginning liability, the addition due to new sales, and the actual claims incurred during the year. Morton Co. sold 100 hot air balloons at $4,000 each, leading to a total sales revenue of $400,000. Given the 4% estimate for repair costs, the company would need to recognize an additional $16,000 (4% of $400,000) in liability for the new sales.

The beginning estimated warranty liability was $42,000. With the additional estimated liability of $16,000 for current year sales, this would increase to $58,000 ($42,000 + $16,000). However, since the company paid out $11,000 in claims, we need to subtract this amount from the estimated liability, resulting in an ending liability of $47,000 ($58,000 - $11,000).

Therefore, the balance in the ending estimated warranty liability at the end of the year was $47,000.