7-37 Module 7 Current and Long-Term Liabilities Exercises LO1 E7-27. Analyzing a

Question

7-37 Module 7 Current and Long-Term Liabilities Exercises LO1 E7-27. 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 2400 of those MBC 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 current period-end balance sheet? (Hint: Remember that some units were repaired in the current period.) c. What analysis issues must we consider with respect to reported warranty liabilities?

Explanation / Answer

a.

Ans

Warranty Expense must report in its current period of income statement of canton company

Warranty Expense= Unit sold * Repair Cost * Estimated percentage of repairs

=100,000 units * $160 *3%=$480,000

b.Ans:

Warranty liabilities will report in its current period at the end of the balance sheet of canton company

=Warranty Liability created at the beginning on estimation- cost of units repaired during the period

=$480000-2400*160=$96,000

C.Ans:

Estimation of warranty liability must be assessed in every accounting period and approximate degree of Magnitude by assessing past experiences

Warranty liability created should be more than the actual liability incurred

Warranty Liability Estimates always tries to tally the Matching of expenses

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