Question

Use the information below to answer the questions that follow.
Riseva Corporation manufactures and sells energy efficient lighting systems. These systems include a complex dimmer module, and about 10% of all units sold require subsequent repair under the warranty. The average repair cost is $80 per unit. Riseva began the year with an accrued warranty liability of $250,000. During the year, 50,000 lighting systems were sold. $310,000 was expended on warranty services performed during the year.
1		How much will appear as warranty expense in the current year income statement?
2		How much will appear as the warranty liability on the balance sheet?

Answer 1

1)

Number of lighting systems sold = 50000

Number of products that require subsequent warranty = 50000*10% = 5000

Average warranty cost per unit = $80 per unit

Warranty expense to be appeared in the current year income statement= Number of lighting systems sold *Average warranty cost per unit

= 5000*$80 = $400000

2)

Beginning Accrued warranty liability = $250000

Less: Warranty liability written off during the year = $310000

Add: Warranty liability recorded during the year = $400000

Warranty Liability on the balance sheet = $250000 - $310000 + $400000 = $340000