1. Cutters sells razors at $50 each. The razors have a 90 day warranty that requ

Question

1. Cutters sells razors at $50 each. The razors have a 90 day warranty that requires the Company to replace any nonworking razor. The Company's cost per razor is $8. The manufacturer estimates an 8% of sales dollars failure rate. In a recent month 150 razors were sold for $7,500 cash. 10 razors were replaced during the month and the beginning balance in the warranty liability account was a credit of $1,000. (A) What is the warranty expense for this month and (B) What is the month end balance in the liability account?

Explanation / Answer

Total Razor Sales ( $ 50 X 150) $                     7,500 Estimated Warranty Expenditures = 8% of 7500 $                        600 Opening Balance of Warranty Liabilitiy = $                     1,000 Add: Provission of the month of Warranty $                        600 Less: Warranty expenses of the month ($ 10*8) $                           80 Closing balance of warranty Liability $                     1,520 Answer = A) Expenses for the month = 8% of $ 7,500 = $                        600 Answer = $ 600 Answer = B) Warranty Liability Balance for the end of the month = $ 1,520

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