Question

Use the following information to answer the next_3__ questions. On January 1, 2019, Nance Company sells 500 copiers. Each copier comes with a 3-year warranty. The company estimates the warranty costs at $150 per machine during the warranty period. During 2019, Nance paid actual warranty costs of $18,000. At year-end some of the machines are still under warranty. 5. The warranty expense for these machines for 2019 is a. $75,000. b. $25,000. c. $57,000. d. $18,000 6. The warranty liability to be shown on the 2019 year-end balance sheet is a. $75,000 b. $25,000. c. $57,000. d. $18,000 7. Nance estimates that the year-end warranty liability will be satisfied ratably over the remaining 2 years. How much of the December 31, 2019 liability balance is considered current? a. $12,500 b. $25.000 c. $9,000 d. 528,500

Answer 1

5. The total warranty expense for 2019 is
(a) $75,000

Justification: Following the principles of matching concept, the warranty expense is to be entirely recorded in the year of sale itself. Therefore, estimated $150 warranty costs for 500 copiers sold = 150 * 500 = $75000

6. Warranty liability to be shown on the 2019 year-end balance sheet is
(c) 57,000

Justification: every time an actual warranty expense is incurred, the company must decrease the amount of the liability by the cost of fulfilling the claim.
As $18,000 costs have actually be incurred, the balance amount in the warranty liability is = 75,000 - 18,000 = 57,000

7. How much of December 31, 2019 liability is considered current
(d) $28,500

Justification: It is clearly stated that remaining liability will be satisfied ratably, meaning proportionately, over the next two years. And as the operating cycle of the company is 1 year, therefore, the portion of liability expected to be fulfilled in the next one year from the end of the current year, will be classified as current liability. Therefore, 57000 * (1 / 2) = 28,500