12. Right Medical introduced a new implant that carries a five-year warranty aga

Question

12. Right Medical introduced a new implant that carries a five-year warranty against manufacture's defects. Based on industry experience with similar product introductions, warranty costs are expected to approximate 1% of sales. Sales were $20 million and actual warranty expenditures were $29,000 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.) Beg. Bal. Warranty expense Actual expenditures End Bal. MacBook Air esc FS F6

Explanation / Answer

1. Warranty Liability

Particulars

Year 1

Beg Balance

0

Warranty Expense (Liability to be booked

($20,000,000 x 1%)

200,000

Actual Expenditure

(29,000)

Liability to report at end of year

171,000

The company should report total warranty liability of $171,000 at the end of the year.

NOTE: In the given question two columns are given but data is given only for first year. I didn't understand the purpose of same. Kindly comment if you get to know thw reason for two columns.

2. Calculation of Interest Expense

Calculation of Interest Expense

Interest Rate

Year end

Interest Expense

Calculation

1

6%

Jan 31

$2.9 Million

64.8 x 6% / 12 x 9 = $2.9 Million

2

8%

Oct 31

$2.6 Million

64.8 x 8% / 12 x 6 = $2.6 Million

3

7%

June 30

$0.8 Million

64.8 x 7% / 12 x 2 = $0.8 Million

4

11%

Dec 31

$4.8 Million

64.8 x 11% / 12 x 8 = $4.8 Million

Note: It is assumed that interest rates are on per annum basis

Particulars

Year 1

Beg Balance

0

Warranty Expense (Liability to be booked

($20,000,000 x 1%)

200,000

Actual Expenditure

(29,000)

Liability to report at end of year

171,000

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