Question

Sony introduces a new compact music player to compete with Apple's iPod that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 1% of sales. By the end of the first year of selling the product, total sales are $29 million, and actual warranty expenditures are $100,000. What amount (if any) should Sony report as a liability at the end of the year? (Enter your answer in dollars, not millions. For example, $5.5 million should be entered as 5,500,000.)

Answer 1

$200,000

Step-by-step explanation:

Remember, Sony expects warranty costs to be approximately 2% of sales.

= 2% of $29,000,000

= $580,000

In its account for the first year actual warranty expenditures is $100,000.

Implies that

Dr Warranty liability $100,000

Cr Cash $100,000

The amount to be reported by Sony as actual liabilities is

$200,000 which should be indicated properly in its account.