Waymire Company sells a motor that carries a 60-day unconditional warranty against product failure. From prior years’ experience, Waymire estimates that 2% of units sold each period will require repair at an average cost of $100 per unit. During the current period, Waymire sold 69,000 units and repaired 1,000 units.
(a) How much warranty expense must Waymire report in its current period income statement?
(b) What warranty liability related to current period sales will Waymire report on its current period-end balance sheet?
(Hint: Remember that some units were repaired in the current period.)
(c) What analysis issues must we consider with respect to reported warranty liabilities?
Warranty liability at any given time should equal the expected dollar cost of repairs not yet paid for.
Understating accrual of warranty liability overstates current period income at the expense of future income.
The issues to consider with respect to warranty liability are whether it actually exists and what is its correct magnitude.
Warranty liability must always be assumed to exist and to be at least 2% of the value of expected sales.
Warranty liability at any given time should equal the actual dollar cost of repairs already paid for.
Understating accrual of warranty liability understates current period income to the benefit of future income.