Accrued Liability Calculation for Product Warranties at Leo Company
What is the accrued liability for product warranties at Leo Company at the end of the year?
To calculate the accrued liability for product warranties at the end of the year, we need to consider the estimated warranty costs and the costs incurred in servicing the warranties. The estimated warranty costs are given as 3% of sales, which amounts to $21,000 ($700,000 * 3%). This represents the estimated future costs that Leo Company expects to incur for fulfilling warranty obligations related to the products sold in 2020. However, the costs incurred in servicing the warranties during 2020 are given as $20,790. These are the actual costs that were expended during the year. To calculate the accrued liability for product warranties at the end of the year, we need to adjust the Estimated Warranty Liability account, which had a credit balance of $400 on January 1, 2020. Accrued Liability = Estimated Warranty Costs - Costs Incurred Accrued Liability = $21,000 - $20,790 Accrued Liability = $210 Therefore, the accrued liability for product warranties at the end of the year is $210. This represents the amount that Leo Company needs to set aside to cover potential future warranty costs for the products sold in 2020.
Explanation:
Accrued Liability Calculation: The accrued liability for product warranties at the end of the year is a crucial financial metric for Leo Company to ensure they have sufficient funds set aside to cover future warranty claims.
Estimated Warranty Costs:
The estimated warranty costs for Leo Company are calculated as 3% of their total sales in 2020, which amounts to $21,000. This figure represents the projected expenses that the company expects to incur in the future to honor warranty obligations for the products sold during the year.
Costs Incurred in Servicing Warranties:
On the other hand, the costs incurred in servicing the warranties during 2020 totaled $20,790. These are the actual expenses that the company had to bear to fulfill warranty claims and meet customer service obligations throughout the year.
Adjusted Estimated Warranty Liability Account:
With an initial credit balance of $400 in the Estimated Warranty Liability account at the beginning of the year, Leo Company needed to adjust this figure based on the estimated warranty costs and the actual costs incurred. By subtracting the costs incurred from the estimated warranty costs, the company arrived at an accrued liability of $210 at the end of the year.
Importance of Accrued Liability Calculation:
Calculating the accrued liability for product warranties is essential for Leo Company to accurately assess their financial obligations and ensure they have adequate reserves to cover future warranty claims. By maintaining an accrual for warranty costs, the company can better manage its cash flow and uphold its commitment to customer service and product quality.