Question 1

A company sells a product with a 2-year warranty. The warranty is not sold separately. Based on history, warranty costs are estimated at 2% of sales. In Year 1, sales were $500,000 and actual warranty costs incurred were $4,000. What is the Warranty Liability at the end of Year 1?

Accepted Answer

Assurance-type warranty (not separate) -> Accrue expense at sale. Liability = Beginning + Expense (Accrual) - Actual Payments.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Confusing expense with liability; ignoring actual payments.

A company sells a product with a 2-year warranty. The warranty is not sold separately. Based on history, warranty costs are estimated at 2% of sales. In Year 1, sales were $500,000 and actual warranty costs incurred were $4,000. What is the Warranty Liability at the end of Year 1?

How to approach this question

Full Answer

Common mistakes

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