Sony introduces a new compact music player to compete with Apple\'s iPod that ca

Question

Sony introduces a new compact music player to compete with Apple's iPod that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 3% of sales. By the end of the first year of selling the product, tota sales are $31 million, and actual warranty expenditures are $300,000. What amount (if any) should Sony report as a liability at the end of the year? (Enter your answer in dollars, not in millions (i.e. 5 should be entered as 5,000,000).) Warranty liability

Explanation / Answer

Total Expected Liability based on the percentage of sales = $       3,10,00,000 x 3% = $       9,30,000 Less: Actual Warranty Expense $       3,00,000 Warranty Liability at the end of the Year $       6,30,000 Working: Based on the percentage, total warrant liability is $ 930,000.It means it is expected that total warranty cost will be such amount over two years of sales. Since $ 300,000 is already incurred, we can record liability of expected cost of warranty for the balance amount of $ 630,000 at the end of The Year.

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