Wu Company estimates its annual warranty expenses at 2 percent of annual net sales.The following details are extracted from its financial statements: $\begin{array}{l}
\text {Net sales }&\$ 4,000,000\
\text { Warranty liability account: }\
\text { January } 1,2014, \text { balance } & \$ 70,000 \text { credit } \
\text { Warranty payments during } 2014 & \$ 60,000 \text { debit }
\end{array}$ After recording the 2014 warranty expense, the warranty liability account would show a December 31, 2014, balance of:

Question

Quizplus · Accepted Answer

The annual warranty expense is estimated at 2% of annual net sales, which is 2% of $4,000,000 = $80,000. The beginning balance of the warranty liability account is a $70,000 credit. During the year, $60,000 is debited for warranty payments. To find the ending balance, add the annual warranty expense to the beginning balance and then subtract the payments: $70,000 + $80,000 - $60,000 = $90,000.

Wu Company Estimates Its Annual Warranty Expenses at 2 Percent