All Things Digital, Inc. starts the year with a credit balance of $3500 in its Estimated Warranty Payable account. During the year, there were $224,000 in sales and $4800 in warranty repair payments. All Things Digital estimates warranty expense at 2% of sales. At the end of the year, what is the balance in the Estimated Warranty Payable account?

Question

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The balance in the Estimated Warranty Payable account at the end of the year is calculated by adding the estimated warranty expense for the year to the beginning credit balance and then subtracting the actual warranty repair payments made during the year. The estimated warranty expense is 2% of $224,000 in sales, which equals $4,480. The beginning balance is a $3,500 credit. Adding the estimated expense to the beginning balance gives $3,500 + $4,480 = $7,980. Subtracting the actual repair payments of $4,800 results in a final balance of $3,180 credit.