Marin Company sells 9,000 units of its product in 2014 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 180 units for a total cost of $9,000. What amount will be reported on Marin Company's statement of financial position as Warranty Liability on December 31, 2014?
A) $9,000.
B) $13,500.
C) $4,500.
D) Cannot be determined.

Question

Quizplus · Accepted Answer

The total warranty expense is calculated as follows:

Expected cost of repairs = 3% x 9,000 units x $50 per unit = $13,500
Actual cost of repairs = $9,000
Estimated cost of repairs to be incurred in the future = $13,500 - $9,000 = $4,500

Therefore, the amount reported on Marin Company's statement of financial position as Warranty Liability on December 31, 2014 will be $4,500.

Marin Company Sells 9,000 Units of Its Product in 2014