Question

During the current year, a company sold 10,000 units of a product that was covered by a two-year assurance warranty against defects. Experience indicates that approximately 4% of the units sold will require warranty repairs, at an average cost of $70 per unit. The actual costs incurred during the year for repairs under the warranty totalled $7,100. What amount of liability (if any) should be reported on the company’s statement of financial position at the end of the current year?

Answer 1

Number of units that will need repair = Total number of units sold x Percentage of units that are defective

= 10,000 x 4%

= 400

Cost of repair = Units needing repair x cost per unit to repair

= 400 x 70

= $28,000

Estimated warranty liability = $28,000

The actual costs incurred during the year for repairs under the warranty totaled $7,100

Warranty liability met during the year = $7,100

Amount of liability to be reported on the company’s statement of financial position at the end of the current year = Estimated warranty liability - Warranty liability met during the year

= 28,000 - 7,100

= $20,900