A firm sells products covered by a three-year warranty.From the past experience of the other firms in the industry,the firm expects to incur warranty costs equal to 1% of sales.Firm sales were $40,000 and $50,000 in 2013 and 2014 respectively.In 2014,the firm spent $200 to repair goods sold in 2013,and $300 to repair goods sold in 2014.The firm received no warranty servicing demands from customers in 2013,the firm's first year of operations.What is the balance in the warranty liability account on January 1,2014?
A) $400
B) $500
C) $300
D) $0

Question

Quizplus · Accepted Answer

The firm expects warranty costs to be 1% of sales. In 2013, sales were $40,000, so the expected warranty liability is 1% of $40,000, which is $400. Since no warranty servicing demands were made in 2013, the entire $400 remains as a liability on January 1, 2014.

A Firm Sells Products Covered by a Three-Year Warranty