Alpha Company sells widgets for $35 each. The widget has a one year warranty. Al

Question

Alpha Company sells widgets for $35 each. The widget has a one year warranty. Alpha estimates that 6% of the widgets will require repair during the warranty period. The estimated average repair cost is $4.30 per widget. On July 31, the Estimated Warranty Liability account had a normal balance of $25,000. During August, sales were $70,000. During August, 470 widgets were repaired under the warranty agreement with an actual cost of $4.50 each. Use this information to determine:

The August 31 Estimated Warranty Liability ending balance

The August Warranty Expense

Explanation / Answer

Alpha Company

Determination of the August 31 Estimated Warranty Liability ending balance:

Estimated Warranty Liability –

Beginning Balance                             $25,000

Add: Estimated repair expense          $516

Total                                                   $25,516

Less: Actual repair expense               $2,115

Ending Balance                                  $23,401

Hence, the August 31, Estimated Warranty Liability Ending balance = $23,401

Workings:

Actual widgets repaired in August = 470

Actual repair cost per widget = $4.50

Actual repair expense in August = $4.50 x 470 = $2,115

August Sales Revenue = $70,000

Widgets sold = 2,000

Estimated repairs = 6%

Estimated repairs = 2,000 x 6% = 120

Estimated repair cost per widget = $4.30

Estimated warranty expense - August = $4.30 x 120 = $516

Hence, the August Warranty Expense = $516

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