[Ralphie Dos Nachos]

Quick question guys:

Hill Corp. began production of a new product. During the first calendar year, 1,000 units of the product were sold for $1,200 per unit. Each unit had a two-year warranty. Based on warranty costs for similar products, Hill estimates that warranty costs will average $100 per unit. Hill incurred $12,000 in warranty costs during the first year and $22,000 in warranty costs during the second year. The company uses the expense warranty accrual method. What should be the balance in the estimated liability under warranties account at the end of the first calendar year?

they’re saying it’s 88,000 but I thought it would be the 66,000 because in the Becker textbook it says “the entire liability for the warranty should be accrued in the year of sale to “match” the cost with the corresponding revenue. The accrual should take place even if part of the warranty expenditure will be incurred in a later year.”

[Riyaad]

1,000 were sold
x $100 warranty cost per unit
________________________________
$100,000 total warranty liability
-12,000 (warranty costs incurred in YR1)
_______________________________________
$88,000 warranty liab at year end

[Author]

Replies