During the year, Going, Going, Gone sold 100 hot air balloons for $4,000 each. The balloons carry a 5-year warranty for defects. Estimates indicate that repair costs will average 4% of the total selling price. The estimated warranty liability at the beginning of the year was $42,000. $11,000 in claims was actually incurred during the year to honor their warranty. What was the balance in the estimated warranty liability at the end of the year?

Question

Quizplus · Accepted Answer

The total selling price of the hot air balloons is 100 balloons * $4,000 each = $400,000. The estimated repair costs at 4% of the total selling price are $400,000 * 4% = $16,000. The beginning balance of the estimated warranty liability was $42,000. During the year, $11,000 in claims was incurred, so the company would add the estimated repair costs for the year ($16,000) to the beginning balance and then subtract the actual claims incurred ($11,000). Therefore, the ending balance in the estimated warranty liability is $42,000 + $16,000 - $11,000 = $47,000.

During the Year, Going, Going, Gone Sold 100 Hot Air