In 2015, Morton Co.sold 150 hot air balloons at $4,000 each.The balloons carry a 5-year warranty for defects.Morton estimates that repair costs will average 4% of the total selling price.The estimated warranty liability at the beginning of the year was $14,000.$20,000 in claims was actually incurred during the year to honor their warranty.What was the warranty expense for 2015?

Question

Quizplus · Accepted Answer

The warranty expense is calculated based on the estimated repair cost that will be incurred during the year. 
Estimated repair cost = 4% of total selling price x number of balloons sold = 0.04 x $4,000 x 150 = $24,000 
The actual claims incurred during the year were $20,000. 
Therefore, the warranty expense for 2015 = estimated repair cost - actual claims incurred = $24,000 - $20,000 = $4,000 
Adding the beginning warranty liability of $14,000, the total warranty expense for 2015 is $18,000. 
Therefore, the best choice is D.