# Warranty expense/ warranty liability

I am really confused with the following problem and do not know where to even start.

C Company began operating near the beginning of 2004. During 2004, C Co. Sold plasma televisions for \$2,000 each, all carrying a two-year warranty against defects. C company's cost for each plasma television was \$1,200. C company doesn't keep inventory on hand. Inventory purchases due on account at the beginning and the end of 2004, respectively, totaled \$24,000 and \$18,000. Warranty costs are estimated at \$300 for each defective product. C Company outsources repairs, and is required to pay the subcontracter at the time of each repair. During 2004, C Company's cash sales for plasma televisions totaled \$3,000,000. The company estimates that 4 percent of the units sold will be returned for repairs under the warranty. Actual warranty expenditures on the plasma televisions totaled \$12,000 for the year.
1. How much will C Company report as warranty expense for 2004?
2. Determine the amount that should be reported on C Company's balance sheet as warranty liablility as of December 31, 2004?

 CaptainForest Posts: 3,684, Reputation: 2085 Ultra Member #2 Feb 11, 2007, 01:21 PM
Total Plasma TV Sales: \$3,000,000 = 1,500 units
Total that will be defected = 4% x 1,500 = 60 units
Cost for warranty is \$300/defected unit = 60 x 300 = \$18,000

JE:
Dr. Warranty Expense 18,000
Cr. Estimated Warranty Liability 18,000

Now, to record the \$12,000 in actual costs you had:
Dr. Estimated Warranty Liability 12,000
Cr. Cash 12,000

So, at the end of the year, your balance will be:
Warranty Expense \$18,000
Estimated Warranty Liability \$6,000 (18,000-12,000)

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