Mariano Corporation sells 11,000 units of inventory during the first year of operations for $500 each. Mariano provides a oneminusyear warranty on parts. It is estimated that 4% of the units will be defective and that repair costs are estimated to be $50 per unit. In the year of sale, warranty contracts are honored on 100 units for a total cost of $5,000. What amount will be reported as Estimated Warranty Liability at the end of the year?

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17 March, 00:54

Mariano Corporation sells 11,000 units of inventory during the first year of operations for $500 each. Mariano provides a oneminusyear warranty on parts. It is estimated that 4% of the units will be defective and that repair costs are estimated to be $50 per unit. In the year of sale, warranty contracts are honored on 100 units for a total cost of $5,000. What amount will be reported as Estimated Warranty Liability at the end of the year?

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Lena Parsons · Answer 1

Estimated warranty liability at the end of the year is $17,000

Explanation:

Number of units sold 11,000

Ist year operation $500 each

Rate of defective 4%

Repair cost $50 per unit

Units Honored 100

Total cost is therefore $5,000

The formula for estimated warranty is given as;

Amount of estimated warranty=[ (units sold x defective rate) - honored units] x repair cost

=[ (11,000 x 4%) - 100] x 50

=[ (11,000 x 0.04) - 100] x 50

=[440-100] x 50

=$17,000