Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2021, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2021. What amount of warranty liability should be reported at December 31, 2021?

Question

Ellie

Business

2 January, 08:08

Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2021, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2021. What amount of warranty liability should be reported at December 31, 2021?

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King Malone · Answer 1

amount of warranty liability that should be reported at December 31, 2021 is $3,375

Explanation:

When the Sale was made, the Warrant Liability is recorded as follows:

Warranty Cost $5,625 (Debit)

Warranty Provision $5,625 (Credit)

Warranty Cost = 750 cell phones * $75 * 10% = $5,625

When Warranty Claims were received during the year the records are as follows:

Warranty Provision $2,250 (Debit)

Cash $2,250 (Debit)

Warranty Cost = 30 * $75 = $2,250

At December 31, 2021 the amount of warranty liability should be

Warranty Provision = $5,625 - $2,250 = $3,375