Question

Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $29 million and actual warranty expenditures were $30,250 for the first year of selling the product. What amount (if any) should Right report as a liability at the end of the year?

Answer 1

$ 259,750

Step-by-step explanation:

Sales = $ 29 million = $ 29,000,000

Expected warranty cost = 1% of the sales = 0.01 × $ 29,000,000 = $ 290000

Actual warranty cost = $ 30,250

Now,

the liability amount at the end of the year is given as:

= Expected warranty cost - Actual warranty cost

or

= $ 290000 - $ 30,250

or

= $ 259,750