Consolidated Business Services introduced a new machine on January 1, 2010.The machine carried a two-year warranty against defects.The estimated warranty costs related to dollar sales were 3% in the year of sale and 5% in the year after sale.Additional information follows: $\begin{array}{rrr}
&&\text { Actual Werranty }\
\text { Year } & \text { Sales } & \text { Expenditures }\
2010 & \$ 50,000 & \$ 900 \
2011 & 80,000 & 4,200
\end{array}$ If the expense warranty accrual method is used, what amount relating to warranties should be reflected on the December 31, 2011, balance sheet?
A)$5, 300
B)$6, 400
C)$6, 500
D)$9, 100

Question

Consolidated Business Services introduced a new machine on January 1, 2010.The machine carried a two-year warranty against defects.The estimated warranty costs related to dollar sales were 3% in the year of sale and 5% in the year after sale.Additional information follows: $\begin{array}{rrr}
&&\text { Actual Werranty }\ 
\text { Year } & \text { Sales } & \text { Expenditures }\
2010 & \$ 50,000 & \$ 900 \
2011 & 80,000 & 4,200
\end{array}$ If the expense warranty accrual method is used, what amount relating to warranties should be reflected on the December 31, 2011, balance sheet?
A)$5, 300
B)$6, 400
C)$6, 500
D)$9, 100

Quizplus · Accepted Answer

The correct answer is A. The expense warranty accrual method requires that warranty expense be recognized in the period of sale, and that an estimated liability be established for future warranty costs. The estimated warranty costs are 3% in the year of sale and 5% in the year after sale. In 2010, the estimated warranty expense is $50,000 x 3% = $1,500. In 2011, the estimated warranty expense is $80,000 x 5% = $4,000. The actual warranty expenditures in 2010 and 2011 were $900 and $4,200, respectively. The difference between the estimated warranty expense and the actual warranty expenditures is the change in the warranty liability. In 2010, the change in the warranty liability is $1,500 - $900 = $600. In 2011, the change in the warranty liability is $4,000 - $4,200 = -$200. The balance in the warranty liability account on December 31, 2011 is $600 - $200 = $400. The estimated warranty expense for 2011 is $4,000. The total amount relating to warranties that should be reflected on the December 31, 2011, balance sheet is $400 + $4,000 = $4,400.

Consolidated Business Services Introduced a New Machine on January 1