During 2012,Going,Going,Gone sold 100 hot air balloons for $4,000 each.The balloons carry a 5-year warranty for defects.Estimates indicate that repair costs will average 4% of the total selling price.The estimated warranty liability at the beginning of the year was $42,000.$11,000 in claims was actually incurred during the year to honor their warranty.What was the balance in the estimated warranty liability at the end of the year?

Question

Quizplus · Accepted Answer

The estimated warranty liability at the end of the year is calculated by adding the estimated warranty costs for the year to the beginning balance and then subtracting the actual claims incurred. The estimated warranty costs for the year are 4% of $400,000 (100 balloons x $4,000), which is $16,000. Adding this to the beginning balance of $42,000 gives $58,000. Subtracting the $11,000 in claims results in a balance of $47,000.

During 2012,Going,Going,Gone Sold 100 Hot Air Balloons for $4,000 Each