Right medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. based on industry experience with similar product introductions, warranty costs are expected to approximate 2% of sales. sales were $8 million and actual warranty expenditures were $42,750 for the first year of selling the product. what amount (if any) should right report as a liability at the end of the year?
Expected warranty costs = 1% of sales
Actual Sales = $27 million
actual warranty expenditures = $33,750
To determine liability amount (if any)
First calculate the warrant expense
Warrant expense = 1% of $27000000
Liability cost = expense - expenditure
= $270,000 - $33,750
Beginning balance Cr $270,000 warrant expenses
Dr Actual expenditure $33,750
Dr End balance $236,250
The estimated warranty liability is credited and warranty expense is debited in the period in which the products under warranty were sold.
Therefore liability of $236,250 will be reported.
Warranty expense (1% × $27,000,000)
warranty liability $ 130,000
the warrant liability will de clared based on sales volume and the expected warranty expenditures associate with sales.
This is done to match the expenses of the warranty with the period on which are generated. If don't further period will have expenditures which related to sales of prior periods.
Having said that we proceeds:
15,000,000 x 1% = 150,000
warranty expenditures (20,000)
the company still spect this sales will generate additioal warranty expenditres for 130,000 dollars. this is a liability.