Question

Crenshaw Corporation sells widgets. Each widget carries a multi-year warranty. Crenshaw estimates the cost of warranty work to be 3% of current sales. 20X4 sales was $5 million and $30,000 was spent on warranty work during 20X4. The balance in Estimated Warranty Liability at 12-31-X3 was $70,000. What is the balance in Estimated Warranty Liability at 12-31-X4 and the balance in Warranty Expense for 20X4, respectively? a. $150,000; $30,000 b. $190,000; $30,000 c. $190,000; $150,000 d. $120,000; $150,000 e. None of the above

I know the answer is C)190,000 ; 150,000 but i just need a step by step explanation on how to get to the answer. thanks in advance!

Answer 1

Correct answer--- c. $190,000; $150,000

Working

Beginning Balance	$      70,000.00
Add: Expense to be recorded during the year (5000000 x 3%)	$ 1,50,000.00
Total Liability	$ 2,20,000.00
Less: Claims Paid during the year	$      30,000.00
Closing balance	$ 1,90,000.00

Following journal entries will be made

Warranty Expense (5000000*3%)	$ 1,50,000.00
Warranty Payable		$    1,50,000.00
(Warranty payable for the year)

Warranty Payable	$      30,000.00
Cash		$        30,000.00
(Warranty Claims paid during the year)