Marin Company sells 4,000 units of its product in 2011 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 80 units for a total cost of $4,000. What amount will be reported on Marin Company's statement of financial position as Estimated Warranty Liability on December 31, 2011?

Question

Quizplus · Accepted Answer

The estimated warranty liability is the expected cost of repairing or replacing defective products under warranty. In this case, 3% of 4,000 units is 120 units that are expected to be defective. At an average repair cost of $50 per unit, the estimated warranty liability is $6,000. However, the company has already honored 80 warranty contracts in the year of sale for a total cost of $4,000. Therefore, the remaining estimated warranty liability on December 31, 2011, is $2,000 (i.e., $6,000 - $4,000 = $2,000), which is the amount that should be reported on Marin Company's statement of financial position. Therefore, the correct choice is C.

Marin Company Sells 4,000 Units of Its Product in 2011