Analyzing and Computing Accrued Warranty Liability and Expense

Analyzing and Computing Accrued Warranty Liability and Expense Waymire Company sells a motor that carries a 60-day unconditional warranty

Analyzing and Computing Accrued Warranty Liability and Expense

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? 
$Answer 138000

(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.)
$Answer 38000
(c) What analysis issues must we consider with respect to reported warranty liabilities?
Answer yes

Warranty liability at any given time should equal the expected dollar cost of repairs not yet paid for.
Answer yes

Understating accrual of warranty liability overstates current period income at the expense of future income.
Answer yes

The issues to consider with respect to warranty liability are whether it actually exists and what is its correct magnitude.
Answer  no

Warranty liability must always be assumed to exist and to be at least 2% of the value of expected sales.
Answer  no

Warranty liability at any given time should equal the actual dollar cost of repairs already paid for.
Answer  no

Understating accrual of warranty liability understates current period income to the benefit of future income.

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