ExpertEasy1 markMultiple Choice
CPA · Question 38 · Area II: Technical Accounting
A company sells a product with a 2-year warranty. The warranty is not sold separately. Based on history, warranty costs are estimated at 2% of sales. In Year 1, sales were $500,000 and actual warranty costs incurred were $4,000. What is the Warranty Liability at the end of Year 1?
A company sells a product with a 2-year warranty. The warranty is not sold separately. Based on history, warranty costs are estimated at 2% of sales. In Year 1, sales were $500,000 and actual warranty costs incurred were $4,000. What is the Warranty Liability at the end of Year 1?
Answer options:
A.
$10,000
B.
$0
C.
$6,000
D.
$4,000
How to approach this question
Assurance-type warranty (not separate) -> Accrue expense at sale. Liability = Beginning + Expense (Accrual) - Actual Payments.
Full Answer
C.$6,000✓ Correct
Warranty Expense = $500,000 * 0.02 = $10,000. This is credited to the Liability. Actual costs of $4,000 are debited to the Liability. Ending Balance = $10,000 - $4,000 = $6,000.
Common mistakes
Confusing expense with liability; ignoring actual payments.
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