Flip Electric began operations in 2012 and provides a one year warranty on the p
ID: 2503238 • Letter: F
Question
Flip Electric began operations in 2012 and provides a one year warranty on the products it sells. They estimate that 10,000 of the 200,000 units sold in 2012 will be returned for repairs and that these repairs will cost $8 per unit. The cost of repairing 8,000 units presented for service in 2012 was $64,000. Flip should report
a. warranty expense of $16,000 for 2012.
b. warranty expense of $80,000 for 2012.
c. warranty liability of $80,000 on December 31, 2012.
d. no warranty obligation on December 31, 2012, since this is only a contingent liability.
PLEASE SHOW FORMULAS
Explanation / Answer
Total No. of Units sold in 2012 expected to be returned for repair in 2013 = 10000.
Cost of each repair = 8/unit.
So net cost to be incurred for the repairs = 80000.
Hence Flip should report warranty liability of $80,000 on December 31, 2012 as the product sold is under warranty and flip is liable for the repairing of those products.
So, this cost will be on the Liability side on the balance sheet.
Option 'c' is correct.
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