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During 2009, Eversharp Co. introduced a high-quality exercise product that has a guaranteed replacement product warranty. The company expects that 2% of the products sold will need to be repaired or replaced at an average cost of $25 per unit. The company sold 300,000 units in 2010.
-Eversharp Co. incurred $15,000 of warranty costs related to the exercise product during 2010: $10,000 was for parts and $5,000 was labor cost for repair personnel. What amount should Eversharp report as estimated warranty liability in the December 31, 2010, balance sheet?
A) $ 5,000
B) $ 10,000
C) $ 15,000
D) $135,000
E) $150,000

Question

Use the following information to answer questions 
During 2009, Eversharp Co. introduced a high-quality exercise product that has a guaranteed replacement product warranty. The company expects that 2% of the products sold will need to be repaired or replaced at an average cost of $25 per unit. The company sold 300,000 units in 2010.
-Eversharp Co. incurred $15,000 of warranty costs related to the exercise product during 2010: $10,000 was for parts and $5,000 was labor cost for repair personnel. What amount should Eversharp report as estimated warranty liability in the December 31, 2010, balance sheet?
A) $ 5,000
B) $ 10,000
C) $ 15,000
D) $135,000
E) $150,000

Quizplus · Accepted Answer

Eversharp should report an estimated warranty liability of $135,000 in the December 31, 2010, balance sheet. This is calculated by estimating the total expected warranty costs based on the sales and expected repair or replacement rate: 300,000 units sold * 2% expected to be repaired or replaced * $25 average cost per unit = $150,000 total expected warranty cost. Since $15,000 was already incurred in warranty costs during 2010, the remaining liability is $150,000 - $15,000 = $135,000.

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