Right Medical introduced a new implant that carries a five-year warranty against

Question

Right Medical introduced a new implant that carries a five-year warranty against manufacturer’s defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $16 million and actual warranty expenditures were $41,750 for the first year of selling the product. What amount (if any) should Right report as a liability at the end of the year? (Enter your answers in whole dollars.)
  

Warranty Liability Beg. Bal. ? ? ? ? Warranty expense Actual expenditures ? ? End Bal. ? ?

Explanation / Answer

                                           warranty liability

beginning balance

$16,000,000

warranty expense

$41,750

actual expenditure(1%of $16,000,000)

$160,000

ending balance

$$16,118,250

     warranty expense ($16,000,000*1%)   =   $160,000

                actual    expenditure                         =     $41,750

                            balance (160,000-41,250) = $ 118,250                                

This is a loss contingency and the estimated warranty liability is credited and warranty expense is debited in the period in which the products under warranty are sold. Right will report a liability of $118,250

                                           warranty liability

beginning balance

$16,000,000

warranty expense

$41,750

actual expenditure(1%of $16,000,000)

$160,000

ending balance

$$16,118,250

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