Question

During 2020, Desert Company 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 the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31, 2020 and 2021 are as follows: Sales Actual Warranty Expenditures 2020 $800,000 $12,000 2021 $1,000,000 $35,000 TOTAL $1,800,000 $47,000 What is the amount of estimated warranty liability Desert should report at December 31, 2021?

Answer 1

Estimated Warranty Liability December 31, 2020

Debit Credit

Beginning balance $0

Actual Warranty Expenditure $12,000 Estimated total cost of $48,000

Warranty $800,000*6%

Ending Balance $36,000

$48,000 $48,000

Estimated Warranty Liability December 31, 2020

Debit Credit

2021 Servicing Expense $35,000 Beginning balance $36,000

Ending Balance $61,000 Estimated total cost of $60,000

Warranty $1,000,000*6%

$96,000 $96,000

So, the company should report an estimated warranty liability of $61,000 at Dec 31, 2021