What is the estimated warranty expense for a company with sales of $225,000 and an estimation of 5%?
The estimated warranty expense for a company with sales of $225,000 and an estimation of 5% would be $11,250. This amount represents the cost incurred by the company to cover the expected expenses for warranty liabilities related to the products sold.
Explanation:
Warranty Liability and Expense
Warranty liability is the obligation a company has to its customers regarding the replacement, repair, or refund of products within a specific period from the date of purchase in case of defects or malfunctioning. On the other hand, the warranty liability expense refers to the cost incurred by the company to cover these warranty liabilities.
Recording the Expenses
In the scenario provided, the company's sales amount to $225,000 for the current period. Based on the estimation that warranty expense will be 5% of sales, the company would need to set aside $11,250 to cover the expected warranty expenses.
Entry for Recording Warranty Expenses:
The correct entry to record the warranty expenses would be:
Warranty Liability Expense ................ $11,250
Estimated Warranty Liability ............. $11,250
Significance of Estimated Warranty Liability
The estimated warranty liability represents the anticipated cost of products sold that are likely to be returned, repaired, or replaced under warranty terms. By recording both the warranty liability expense and estimated warranty liability, the company ensures that it has sufficient funds set aside to cover any future warranty-related expenses.
In conclusion, understanding and accurately estimating warranty expenses are crucial for businesses to manage their financial obligations and maintain customer satisfaction. By recording warranty expenses and liabilities appropriately, companies can prepare for any potential costs associated with warranty claims and uphold their commitment to their customers.