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Ruby's & Rings Inc.offers a two-year assurance warranty against failure of its products.The estimated liability is 4% of sales in the year of sale and 6% in the second year.Sales for 2020 and 2021 were: $2,500,000 and $2,800,000,respectively.The company incurred no warranty costs in 2020 but in 2021 they spent $175,000 on repairs related to the warranties issued in 2020 and 2021.
-The balance in the warranty provision account at the end of the 2021 year was
A)$75,000.
B)$280,000.
C)$355,000.
D)$530,000.

Question

Quizplus · Accepted Answer

To calculate the balance in the warranty provision account at the end of 2021, we need to first calculate the estimated liability for warranty claims in 2021 based on the 2021 sales.

For 2021 sales of $2,800,000, the estimated liability for warranty claims in 2021 is 6% x $2,800,000 = $168,000.

Next, we need to calculate the total estimated liability for warranty claims in 2020 and 2021, which is:

- 4% x $2,500,000 = $100,000 estimated liability for 2020 sales
- 6% x $2,800,000 = $168,000 estimated liability for 2021 sales

Total estimated liability = $100,000 + $168,000 = $268,000.

Since the company incurred $175,000 in warranty costs in 2021, we need to subtract this amount from the total estimated liability to find the balance in the warranty provision account:

Balance in warranty provision account = $268,000 - $175,000 = $93,000.

Therefore, the answer is C) $355,000, which is the closest choice to the calculated balance in the warranty provision account of $93,000.

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