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Warranty liability and expense

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The Athletic Accountant Company produces exercise equipment for accountants. Its main product, the Pencil-Pusher Push-Up Platform, is sold with a three-year warranty against defects. The company expects that 1% of the units sold will prove to be defective in the first year after they were sold, 2% will be prove defective in the second year, and 3% of the units sold will prove to be defective in the third year. The average cost to repair or replace a defective unit under the warranty is expected to be $50.

The company's sales and warranty costs incurred during its first three years were as follows:

Units sold Actual costs of repairs and replacements under the warranty plan
2006 9,000 units $ 5,000
2007 12,000 units $ 16,000
2008 17,000 units $ 37,000

Calculate the amount that should have appeared in the warranty obligation (liability) account at the end of 2006.
Calculate the amount of warranty expense that should have been recognized in 2007.

Solution Preview

1. Total warranty costs are 1%+2%+3%=6% of sales. For 2006, total warranty costs would be ...

Solution Summary

The solution explains how to determine the amount of warranty liability and warranty expense