Question

Wells Electric (WE) owed Estimated Warranty Payable of $ 1 comma 200 at the end of 2017. During 2018, WE made sales of $ 120 comma 000 and expects product warranties to cost the company 3% of the sales. During 2018, WE paid $ 2 comma 300 for warranties. What is WE's Estimated Warranty Payable at the end of 2018?

A. $ 2, 300
B. $ 2, 500
C. $ 3, 600
D. $ 4, 800

Answer 1

Wells Electric's Estimated Warranty Payable at the end of 2018 is calculated by starting with the opening balance, adding the expected warranty costs based on sales, and then subtracting the actual warranty costs paid. The correct value is $2,500.

Step-by-step explanation:

We need to calculate Wells Electric's (WE) Estimated Warranty Payable at the end of 2018 by taking into account the opening balance, additional warranty expenses estimated, and actual warranty costs incurred during the year.

The opening balance of the Estimated Warranty Payable for 2018 is $1,200. WE expects product warranties to cost 3% of their sales, which totals to $120,000.

Therefore, the expected warranty cost for 2018 sales is 3% of $120,000, which equals $3,600 (0.03 x $120,000).

In addition to the expected warranty cost, we must adjust the Estimated Warranty Payable by subtracting actual warranty costs paid during the year, which amount to $2,300.

The calculation is as follows:

Estimated Warranty Payable at end of 2017: $1,200
Plus: Expected warranty cost on 2018 sales: $3,600
Less: Actual warranty costs paid in 2018: ($2,300)

Estimated Warranty Payable at end of 2018: $2,500

Therefore, option B, $2,500, is the correct answer.