Right Medical introduced a new implant that carries a five-year warranty against

Question

Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $32 million and actual warranty expenditures were $25,750 for the first year of selling the product. What amount (if any) should Right report as a liability at the end of the year? (Enter your answers in whole dollars.)

Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $32 million and actual warranty expenditures were $25,750 for the first year of selling the product. What amount (if any) should Right report as a liability at the end of the year? (Enter your answers in whole dollars.)

Explanation / Answer

This is a loss contingency and the estimated warranty liability is credited and warranty expense is debited in the period in which the products under warranty are sold. Right will report a liability of $ 294,250.

Net Warranty Liabilty = Expected Warranty Cost - Actual Expenditure

= (1% of $ 32,000,000) - $ 25,750

= (320,000 - 25,750)

= $ 294,250

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