During the year, Great Adventures sold 150 dune buggies for $4,000 each. The dune buggies carry a 5-year warranty for defects. Estimates suggest that repair costs will average 4% of the total selling price. The estimated warranty liability at the beginning of the year was $14,000, and $20,000 in claims was actually incurred during the year to honor the warranty. What was the warranty expense at the end of the year?

Question

Quizplus · Accepted Answer

First, we need to calculate the total revenue from selling dune buggies:
Total revenue = 150 buggies x $4,000 per buggy = $600,000

Next, we need to calculate the estimated warranty liability at the end of the year:
Estimated liability = Beginning liability + Warranty expenses - Claims honored
Estimated liability = $14,000 + (4% x $600,000) - $20,000
Estimated liability = $14,000 + $24,000 - $20,000
Estimated liability = $18,000

The warranty expense at the end of the year is simply the change in the estimated liability from the beginning of the year to the end of the year:
Warranty expense = Estimated liability at end of year - Estimated liability at beginning of year
Warranty expense = $18,000 - $14,000
Warranty expense = $4,000

Therefore, the warranty expense at the end of the year is $4,000, which is option D.

During the Year, Great Adventures Sold 150 Dune Buggies for $4,000