Question

During 2013, Going, Going, Gone sold 100 hot air balloons for $4,000 each. The balloons carry a 5-year warranty for defects. Estimates indicate that repair costs will average 4% of the total selling price. The estimated warranty liability at the beginning of the year was $42,000. $11,000 in claims was actually incurred during the year to honor their warranty. What was the balance in the estimated warranty liability at the end of the year

Answer 1

Value of addition into warranty during the current year = Total Selling price * 4%

= (100*$4000) * 4%

= $400,000 * 4%

= $16,000

Warranty liability balance Amount ($)

Opening $42,000

Add: Addition during the year $16,000

Less: Claims actually incurred $11,000

Closing balance $47,000