Talks-A-Lot,Inc.sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program.The average repair cost is $75 per phone.For 2018,Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31,2018.What amount of warranty liability should be reported at December 31,2018?
A)$2,250.
B)$3,375.
C)$5,625.

Question

Quizplus · Accepted Answer

First, we need to calculate the expected number of phones that will be returned for repair under the warranty program:

Expected number of phones returned = 10% of phones sold = 0.1 x 750 = 75 phones

Since only 30 phones have been repaired as of December 31, 2018, there are still 45 phones expected to be returned for repair in the future.

Next, we need to calculate the total warranty liability:

Total warranty liability = Expected number of phones returned x Average repair cost per phone 
= 45 x $75 
= $3,375

Therefore, the correct answer is B.