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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

Respuesta :

jepessoa

Answer:

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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