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 $27 million and actual warranty expenditures were $33,750 for the first year of selling the product. What amount (if any) should Right report as a liability at the end of the year?

$236,250

Explanation:

Given

Expected warranty costs = 1% of sales

Actual Sales = $27 million

actual warranty expenditures = $33,750

To determine liability amount (if any)

First calculate the warrant expense

Warrant expense = 1% of $27000000

= $270,000

Liability cost = expense - expenditure

= $270,000 - $33,750

= $236,250

$236,250

Explanation:

Warranty liability

Beginning balance Cr $270,000 warrant expenses

Dr Actual expenditure $33,750

Dr End balance $236,250

The estimated warranty liability is credited and warranty expense is debited in the period in which the products under warranty were sold.

Therefore liability of $236,250 will be reported.

Warranty expense (1% × $27,000,000)

=$270,000

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