Lulzbot.com sells 6000 units of its product for $500 each during the year ending December 31 2017. 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 120 units for a total cost of $6000. What amount will be reported on Lulzbot.com's balance sheet as Warranty Liability on December 31 2017?
A) $6000
B) $9000
C) $3000
D) It cannot be determined.

Question

Quizplus · Accepted Answer

The expected warranty cost per unit is 3% x $500 = $15. 
The total expected warranty liability is 6000 units x $15 per unit = $90,000. 
Since only 120 units were repaired during the year for a cost of $6000, the remaining warranty liability at December 31, 2017 is $90,000 - $6000 = $84,000. Therefore, the balance sheet should report a warranty liability of $3000.

LulzbotCom Sells 6000 Units of Its Product for $500 Each