Question

During 2016 Green Thumb Company introduced a new line of garden shears that carry a two-year warranty against defects. Experience indicates that warranty costs should be 2% of net sales in the year of sale and 3% in the year after sale. Net sales and actual warranty expenditures were as follows: Net sales Actual warranty expenditures2016 $ 45,000 $ 1,000 2017 120,000 3,500 At December 31, 2017, Green Thumb should report as a warranty liability of:Multiple Choice$900$1,250$3,750$4,500

Answer 1

$3,750

Step-by-step explanation:

Data given

Net sales of 2016 = $45,000

After-sale percentage = 3%

Net sales of 2017 = $120,000

Year of sale percentage = 2%

The computation of warranty liability is shown below:-

Warranty liability = (Net sales of 2016 × After-sale percentage) + (Net sales of 2017 × Year of sale percentage)

= ($45,000 × 3%) + ($120,000 × 2%)

= $1,350 + $2,400

= $3,750

Therefore for computing the warrant liability we simply applied the above formula.