Question

3. During 2017, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 4% within 12 months following sale and 6% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2017 and 2018 are as follows:

                                                                               Actual Warranty

                                    Sales                                    Expenditures

2017                        $   400,000                                   $8,000

2018                            600,000                                 14,000

                                  $1,000,000                                 $22,000

1. At December 31, 2018, (assuming the accrual method) what amount should be reported as an estimated warranty liability?
2. Why are warranties recorded as an expense in the year of the sale, i.e., what accounting principle applies?

Answer 1

Hence, warranty liability to be recognized for the year ended 31 December, 2018 is $78000

(b) Matching principle applies where it states to report expenses in the same period as related revenue earned.