For letter (C): answer choices are either YES or NO QUESTION 1 Not complete Mark

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For letter (C): answer choices are either YES or NO

QUESTION 1 Not complete Marked out of 8.00 P Flag question Analyzing and Computing Accrued Warranty Liability and Expense Canton Company sells a motor that carries a 60-day unconditional warranty against product failure. From prior years' experience, Canton estimates that 3% of units sold each period will require repair at an average cost of $160 per unit. During the current period, Canton sold 100,000 units and repaired 2,400 of those units. (a) How much warranty expense must Canton report in its current period income statement? (b) What warranty liability related to current period sales will Canton report on its the current period.) c) What analysis issues must we consider with respect to reported warranty liabilities? repairs already paid for value of expected sales repairs not yet paid for. + Warranty liability at any given time should equal the actual dollar cost of Warranty liability must always be assumed to exist and to be at least 2% of the +Warranty liability at any given time should equal the expected dollar cost of

Explanation / Answer

a) Warranty Expense..........Dr...$480000
Warranty Liability.........Cr....$480000  

3%*100000*$160=$480000

b)
Liability to be shown:
$480000-($160*2400 units)=$96,000

Note:
At the end of the year, the warranty liability (the remaining obligation to be satisfied) is equal to the total
warranty obligation (480,000) minus the warranty obligation that was satisfied during the year when some
of the units were repaired (160 x 2400 = 384,000)

c)
no-Warranty liability at any given time should equal the actual dollar cost of repairs
already paid for.

no-Warranty liability must always be assumed to exist and to be at least 2% of the value
of expected sales.

yes-Warranty liability at any given time should equal the expected dollar cost of repairs
not yet paid for.

yes-The issues to consider with respect to warranty liability are whether it actually exists
and what is its correct magnitude.

yes-understating accrual of warranty liability overstates current period income at the
expense of future income( warranty expense will be lower than the actual amount.)

no-Understating accrual of warranty liability understates current period income
to the benefit of future income

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