In 2016, 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 2016?

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Quizplus · Accepted Answer

The warranty expense for 2016 is calculated by first determining the estimated warranty liability for the sales made in 2016, which is 4% of the total selling price (150 balloons * $4,000 each = $600,000 total selling price; 4% of $600,000 = $24,000). The beginning warranty liability was $14,000, and $20,000 in claims were incurred. The expense for the year is the amount needed to adjust the warranty liability to reflect the estimated future costs based on this year's sales, which is $24,000, regardless of the claims paid during the year.