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3 March, 14:04

In 2016, General Dynamics Corporation began selling a new line of products that carries a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:

First-year of warranty 2%

Second-year of warranty 5%

Sales and actual warranty expenditures for 2016 and 2017 are presented below:

2016 2017

Sales $600,000 $800,000

Actual warranty expenditures $20,000 $40,000

What is the estimated warranty liability at the end of 2017 in $?

A. 20,000

B. 64,000

C. 38,000

D. 96,000

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Answers (1)
  1. 3 March, 17:34
    0
    C) 38,000

    Explanation:

    The estimated warranty liability for 2017:

    = [2016 sales x (first + second year warranty costs) ] + [2017 sales x (first + second year warranty costs) ] - (warranty expenses for 2016 and 2017)

    = [$600,000 x (2% + 5%) ] + [$800,000 x (2% + 5%) ] - ($20,000 + $40,000)

    = $42,000 + $56,000 - $60,000 = $38,000
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