Please explain with detailed steps. Belmont Inc. offers a two-year warranty agai
ID: 2389490 • Letter: P
Question
Please explain with detailed steps.Belmont Inc. offers a two-year warranty against failure of its products. The estimated liability is
4% of sales in the year of sale and 6% in the second year. Sales for 2008 and 2009 were:
$2,000,000 and $2,200,000, respectively. They incurred no warranty costs in 2008 but in 2009
they spent $125,000 on repairs related to the warranties from 2008 and 2009.
The warranty liability as at the end of the 2009 year was:
a. $95,000
b. $220,000
c. $295,000
d. $420,000
Explanation / Answer
Total warranty liability in 2009 = 4%*$2,200,000 + 6%*$2,200,000 + 6% *$2,000,000 = $340000 Total costs incurred = $125,000 warranty liability as at the end of the 2009 year = $340000-$125,000 = b. $220,000