Hiatt Company sells automatic can openers under a 75-day warranty for defective

Question

Hiatt Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Hiatt estimates that 3% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing or repairing a defective unit is $20. The units sold and units defective that occurred during the last 2 months of 2010 are as follows.

Determine the estimated warranty liability at December 31 for the units sold in November and December.

Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 1,000 warranty claims. (Assume actual costs of $20,000.)

Give the entry to record the honoring of 500 warranty contracts in January at an average cost of $20.

Q2: The following financial data were reported by 3M Company for 2006 and 2007 ($ in millions).

1,728

1,796

Calculate the current ratio and working capital for 3M for 2006 and 2007.(Round current ratio to 2 decimal places, e.g. 10.50.)

Suppose that at the end of 2007 3M management used $200 million cash to pay off $200 million of accounts payable. How would its current ratio and working capital have changed? (Round current ratio to 2 decimal places, e.g. 10.50.)

Explanation / Answer

November
30000 x 3% = 900 (units expected to be defective)

of the 900 expected, 600 warranties have already been claimed, leaving 300.

Estimate cost per unit = $20
Estimated warranty liability = $20*300 estimated claims after 12/31 = $6000

december

32000 x 3% = 960 (units expected to be defective)

of the 960 expected, 400 warranties have already been claimed, leaving 560

Estimate cost per unit = $20
Estimated warranty liability = $20*560 estimated claims after 12/31 = $1120

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