11. During 2006, Ward Company introduced a new product carrying a two-year warra

Question

11. During 2006, Ward Company introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2006 and 2007 are as follows: Actual Warranty Sales Expenditures 2006 $300,000 $ 4,500 2007 500,000 15,000 $800,000 $ 19,500 At December 31, 2007, Ward would report an estimated warranty liability of: a. $28,500. b. $22,500. c. $ 8,500. d. $ 5,000.

Explanation / Answer

answer : a) $28,500 Each year, warranty expense is estimated at 6% of sales and recorded by debiting the expense account and crediting the liability. As warranty expenditures are made, the liability is debited and cash is credited. Note that the total estimated warranty cost for both years [(.02 + .04) = .06] is recorded in the year of sale in compliance with the matching principle.

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