# Important information about Estimated warranty liability

How do I determine the estimated warranty on Part B? Do I multiply by 100. Please advise.

Colin Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experiences, Colin Company estimates that 3% of the units sold will become defective during the warranty period.
Management estimates that the average cost of replacing or repairing a defective unit is \$15.00 The units sold and units defective that occurred during the last 2 months of 2006 are as follows:
Month Units sold Units Defective Prior to December 31
November 30,000 600
December 32,000 400

Instructions:
(a) Determine the estimated warranty liability at December 31 for the units sold in November and December.

Estimated warranties outstanding:
Month Estimate Units Defective Outstanding
November Number Number Formula
December Number Number Formula
Total Formula Formula Formula
Estimated warranty cost Amount
Estimated warranty liability Formula

(b) Prepare the journal entries to record the estimated liability for warranties and the costs (assume actual costs of \$15,000) incurred in honoring 1,000 warranty claims.

Account title Amount
Account title Amount

Account title Amount
Account title Amount

(c) Give the entry to record the honoring of 500 warranty contracts in January at an average cost of \$15

Account title Amount
Account title Amount

#### Solution Summary

The solution explains how to calculate the estimated warranty liability and pass the related journal entries.