During 2006, Blass Co.introduced a new product carrying a two-year warranty against defects.The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale.Sales and actual warranty expenditures for the years ended December 31, 2006 and 2007 are as follows:
At December 31,2007 Blass should report an estimated warranty liability of
A)$0.
B)$10,000.
C)$30,000.
D)$66,000.

Question

During 2006, Blass Co.introduced a new product carrying a two-year warranty against defects.The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale.Sales and actual warranty expenditures for the years ended December 31, 2006 and 2007 are as follows: 
 At December  31,2007   Blass should report an estimated warranty liability of 
A)$0. 
B)$10,000. 
C)$30,000. 
D)$66,000.

Quizplus · Accepted Answer

The estimated warranty liability is calculated based on the sales and the warranty cost percentages. For 2006 sales, 2% is expected in the first year and 4% in the second year. For 2007 sales, only 2% is expected in the first year. Calculating these and subtracting actual expenditures gives the liability.