Question

Sales are $500,000, Warranty costs are estimated to be 2% of sales, and the firm spent $6,000 in warranty repairs. What is the Liability for warranties at the end of the year?

- $10,000
- $6,000
- $4,000
- Cannot be determined.

Answer 1

The Liability for warranties at the end of the year is $10,000.

Step-by-step explanation:

The Liability for warranties at the end of the year can be calculated by multiplying the estimated warranty cost percentage by the sales. In this case, the estimated warranty cost is 2% of $500,000 sales, which is $10,000. However, the actual amount spent on warranty repairs was $6,000. The Liability for warranties at the end of the year is the higher of these two amounts, which is $10,000.