During Year 1, Rex Co. Introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale, and 4% in the second 12 months following sale. Sales and actual warranty expenditures for December 31, Year 1 and Year 2 are as follows:
|
Sales |
Actual Warranty Expenditures |
|
Year 1: $ 600,000 |
Year 1: $9,000 |
|
Year 2: 1,000,000 |
Year 2: 30,000 |
|
Total: $1,600,000 |
Total: $39,000 |
Determine the estimated warranty liability Rex should report at December 31, Year 2.
Discussion: Because this product is new, the beginning balance in the estimated warranty liability account at the beginning of Year 1 is $0.
For Year 1, the estimated warranty costs related to dollar sales are 6% (2% + 4%) of sales or $36,000 ($600,000 x 6%).
For Year 2, the estimated warranty costs are $60,000 ($1,000,000 sales x 6%). These amounts are charged to warranty expense and credited to the estimated warranty liability account. This liability account is debited for expenditures of $9,000 and $30,000 in Year 1 and Year 2, respectively.
Hence, the estimated warranty liability at 12/31/Year2 is $57,000.
Estimated Warranty Liability
|
Year 1 expenditures $ 9,000 Year 2 expenditures 30,000 |
$ 0 1/1Year 1 36,000 Year 1 expense 60,000 Year 2 expense |
|
|
57,000 12/31/Year 2 |