Question

Lovely Company offers a 2-year warranty on its product and as of 1/1/2018 Lovely’s warranty liability had an overall balance of $415. During 2018 Lovely sold 1,600 units of inventory at a selling price of $125 per unit and repaired 62 units under warranty at a total repair cost to Lovely of $740. When accounting for warranty cost, Lovely studies prior year customer claims as well as projected labor and material costs and for 2018, Lovely estimated that 4% of the units sold in 2018 would break over the 2-year warranty period at an estimated repair cost of $12.50 per unit. What amount should Lovely report at 12/31/2018 as warranty liability

Answer 1

$475

Step-by-step explanation:

the summary journal entry to record sales revenue and warranty expense during 2018:

Dr Cash 200,000

Cr Sales revenue 200,000

Dr Warranty expense 800

Cr Warranty liability 800

The journal entry to account for actual warranty costs:

Dr Warranty liability 740

Cr Cash (or wages payable or inventory) 740

the December 31, 2018 balance of warranty liability = initial balance + warranty liability associated to 2018 sales - incurred warranty costs = $415 + $800 - $740 = $475