During 2014, Gadget Co. introduced a new product carrying a 3 year warranty agai

Question

During 2014, Gadget Co. introduced a new product carrying a 3 year warranty against defects. The estimated warranty costs related to the dollar sales are 1% within 12 months following the sale, 2% in the second 12 months following the sale and 3% in the following 12 months, until the end of the warranty period. Sales and actual warranty expenses were as follows:

                                                   Sales                         Actual warranty expenses

2014                                   $80,000    $1,000

2015                                       95,000 3,100

2016                                     102,000     6,150

What amount should Gadget report as estimated warranty liability at December 31, 2015?

$4,800

$6,370

$6,400

$16,620

$4,800

$6,370

$6,400

$16,620

Explanation / Answer

estimated warrantly liability

2014 - 80,000 * 6% = $4,800

2015 - 95,000 * 6% = $5,700

Less actual warranty expenses (1,000+3,100) ($4,100)

Estimated warrantly liability at 31, december 2015 = $6,400 (4,800+5,700-4,100)

So the correct option is C

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