In 2016, Scranton, Inc.sold 2,000 carpets for $50 each.The carpets carry a 2-year warranty for repairs.Scranton estimates that repair costs will average 3% of the total selling price.What is the amount that would be recorded in the warranty liability account as a result of selling the carpets during 2016?
A) $1,500
B) $3,000
C) $50
D) No liability should be recorded until the carpets are returned for repairs.

Question

Quizplus · Accepted Answer

The warranty liability account should be recorded at the time of sale to match the cost of future repairs to the revenue generated by the sale. The estimated repair costs are 3% of the total selling price of $50, which is $1.50 per carpet. Therefore, the total amount recorded in the warranty liability account for 2,000 carpets would be $1.50 x 2,000 = $3,000.