Question

In 2020, Quapau Products introduced a new line of hot water heaters that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs were expected to approximate 5% of sales revenue. First-year sales of the heaters were $360,000. An evaluation of the company’s claims experience in late 2021 indicated that actual claims were less than expected—4% of sales rather than 5%.Assuming sales of the heaters in 2021 were $410,000 and warranty expenditures in 2021 totaled $14,400, what is the 2021 warranty expense?

Answer 1

The 2021 warranty expense is $16,400

Step-by-step explanation:

In order to calculate the 2021 warranty expense we would have to calculate the estimated warrany liability using the following formula:

estimated warrany liability=warranty expense×actual claim percentage

estimated warrany liability=$410,000×4%

estimated warrany liability=$16,400

The estimated warrany liability would be $16,400, therefore, the warrany expense would be of $16,400 and we would have to the record in the 2021 a warrany expense of $16,400 as follows:

Debit Credit

warrany expense $16,400

estimated warrany liability $16,400