Question

During 2016, The Molly Machine Company began selling a new type of machine that carries a...

During 2016, The Molly Machine Company began selling a new type of machine that carries a two-year warranty against defects. Based on past industry and company experience, estimated warranty cost should total $2,000 per machine sold. Sales and actual warranty expenditures for 2016 were $2,000,000 (40 machines) and 22,000 respectively. What amount should Molly report at its esrtimated warranty liablility at December 31, 2016?

a. 58,000

b. 120,000

c. 22,000

d. 0

Business   Accounting   
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Answer #1
Step 1
To record the Warranty expense for the year 2016
Journal entry that will be passed to record the warranty expense is as under,
Account Titles Debit Credit
Warranty Expense $80,000.00
Warranty Liability $80,000.00
Step 2
To record the Warranty expense incurred during the year 2016
Account Titles Debit Credit
Warranty Liability $22,000.00
Cash $22,000.00
Step 3
The Molly should report estimated warranty liablility at December 31, 2016
Net balance in Warrant Liability account (shown under Current Liabilities in Balance sheet) = $80000 - $22000 = $58,000
The answer is Option a.
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