Mitchell Corporation sells 4,000 units of inventory during the year for $500 each. The selling price includes a one-year warranty on parts. It is estimated that 3% of the units will be defective and that repair costs are estimated to be $50 per unit. In the year of sale, warranty contracts are honored on 80 units for a total cost of $4,000. What amount will be reported as Estimated Warranty Liability at the end of the year?
A) $4,000.
B) $2,000.
C) $6,000.
D) $0.

Question

Quizplus · Accepted Answer

The estimated warranty liability is calculated as 3% of 4,000 units, which is 120 units. At $50 per unit, the total estimated cost is $6,000. Since $4,000 has already been incurred, the remaining liability is $2,000.

Mitchell Corporation Sells 4,000 Units of Inventory During the Year