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?
A) $2,250.
B) $3,375.
C) $5,625.
D) None, all expected returns from warranties have been received.
Answer: B
In 2021, a company estimates that warranty costs in the following year will be $25,000. Actual warranty costs in 2022 are only $20,000. What is the effect on the accounting equation when recording actual warranty costs in 2022?
A) Stockholders' equity decreases.
B) Stockholders' equity increases.
C) Liabilities increase.
D) Liabilities decrease.
Answer: D
Patriot Paddleboards sells a paddleboard model that carries a one-year warranty on all included accessories. Past experience indicates that 15% of those sold will have defective accessories within a year and that average repair cost is $20 per paddleboard. If 1,000 were sold this year and 50 have already been repaired under warranty, the entry to record warranty expense for the year would include a debit to:
A) Warranty Expense of $2,000.
B) Warranty Liability of $2,000.
C) Warranty Liability of $3,000.
D) Warranty Expense of $3,000.
Answer: D
