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This posting addresses estimated warranty liabilities.

During 2010, Eaton Co. introduced a new product carrying a 2-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2010 and 2011 are as follows.

Sales Actual Warranty Expenditures
2010 800,000 12,000
2011 1,000,000 30,000
Sub-Total 1,800,000 42,000

At December 31, 2011, Eaton should report an estimated warranty liability of:
a) 0
b) 10,000
c) 30,000
d) 66,000

Solution Summary

The solution provides the exact calculation needed to determine the amount of estimated warranty liability for Eaton Co.