Eastern Company sells products covered by a 3-year warranty.Based on past experience of other entities in the industry,Eastern expects to incur warranty costs equal to 1% of sales.Eastern's sales were $45,000 in 2013 and $50,000 in 2014.In 2014,the company spent $200 to repair goods sold in 2013 and $300 to repair goods sold in 2014.Eastern received no warranty servicing demands from its customers in 2013,the company's first year of operations. What is the balance in the warranty liability account on January 1,2015?

Question

Quizplus · Accepted Answer

The warranty liability is calculated based on expected costs. For 2013, the expected warranty cost is 1% of $45,000, which is $450. For 2014, it is 1% of $50,000, which is $500. Total expected costs are $950. Actual costs incurred were $200 (2013) + $300 (2014) = $500. The balance is $950 - $500 = $450.

Eastern Company Sells Products Covered by a 3-Year Warranty