Warranty expense/ warranty liability
Asked Feb 10, 2007, 10:03 PM
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?