During 2014 Gum Co. introduced a new product carrying a 2 year warranty against

Question

During 2014 Gum Co. introduced a new product carrying a 2 year warranty against defects. The estimated warranty costs related to dollar sales are 4% within 12 months following sales and 8% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31st 2014 and 2015 are as follows

Sales Actual Warranty Expenditures

2014 $800,000 $24,000

2015 $1000000 $60,000

Total $1,800,000 $84,000

What amount should Gum report as estimated warranty liability in its Dec 31st 2015 Balance sheet?

A. 36000

b. 60000

c. 132000

d. 216000

Please show how you got the correct answer, not just the answer.

Explanation / Answer

Estimated warranty liability in its Dec 31st 2015 Balance sheet = 1800000*(8%+4%)-84000= 132000 Option C is correct

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