Western Company sells products covered by a 3-year warranty. Based on past experience of other entities in the industry, Western expects to incur warranty costs equal to 1% of sales. Western's sales were $40,000 in 2010 and $50,000 in 2011. In 2011, the company spent $200 to repair goods sold in 2010 and $300 to repair goods sold in 2011. Western received no warranty servicing demands from its customers in 2010, the company's first year of operations.
What is the balance in the warranty liability account on January 1, 2012?

Question

Quizplus · Accepted Answer

The warranty liability is calculated as 1% of total sales minus the actual warranty costs incurred. For 2010, the liability is $400 (1% of $40,000), and for 2011, it is $500 (1% of $50,000). Total liability is $900. Actual costs were $200 (2010) + $300 (2011) = $500. Thus, the balance is $900 - $500 = $400.

Western Company Sells Products Covered by a 3-Year Warranty