Marin Company sells 9,000 units of its product in 2018 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 180 units for a total cost of $9,000. What amount will be reported on Marin Company's balance sheet as Warranty Liability on December 31, 2018?

Question

Quizplus · Accepted Answer

The estimated warranty liability can be calculated as follows: 
Number of defective units = 9,000 x 3% = 270 
Cost of repairing each unit = $50 
Total estimated warranty liability = 270 x $50 = $13,500 
However, the company has already honored warranty contracts on 180 units, which cost $9,000. Therefore, the remaining estimated warranty liability would be $13,500 - $9,000 = $4,500, which is the amount that should be reported on the balance sheet.

Marin Company Sells 9,000 Units of Its Product in 2018