During 2010, Eaton 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, 2010 and 2011 are as follows: At December 31, 2011, Eaton should report an estimated warranty liability of

Question

During 2010, Eaton 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, 2010 and 2011 are as follows:  At December 31, 2011, Eaton should report an estimated warranty liability of

Quizplus · Accepted Answer

To calculate the estimated warranty liability at December 31, 2011, we need to consider the sales made in 2010 and 2011, as well as the estimated warranty costs related to these sales.

For the 2010 sales: 
Sales = $500,000 
Warranty costs within 12 months of sale = 2% of $500,000 = $10,000 
Warranty costs in the second 12 months following sale = 4% of $500,000 = $20,000 
Total warranty costs for 2010 sales = $30,000

For the 2011 sales: 
Sales = $700,000 
Warranty costs within 12 months of sale = 2% of $700,000 = $14,000 
Warranty costs in the second 12 months following sale = 4% of $700,000 = $28,000 
Total warranty costs for 2011 sales = $42,000

Therefore, the total estimated warranty liability at December 31, 2011 is: 
$30,000 + $42,000 = $72,000

However, we need to consider the actual warranty expenditures made in 2010 and 2011: 
Actual warranty expenditures in 2010 = $8,000 
Actual warranty expenditures in 2011 = $58,000

Therefore, we need to adjust the total estimated warranty liability by subtracting the actual warranty expenditures: 
$72,000 - $8,000 - $58,000 = $6,000

Thus, the estimated warranty liability at December 31, 2011 is $66,000. Therefore, the correct answer is D.