Eaton Co. Estimated Warranty Liability Calculation

What was the total sales and actual warranty expenditures for Eaton Co. in the years ended December 31, 2012 and 2013? The total sales for Eaton Co. in the years ended December 31, 2012 and 2013 were $1,800,000. The actual warranty expenditures for the same period were $47,000.

In order to calculate the estimated warranty liability for Eaton Co. at December 31, 2013, we need to consider the percentage of warranty costs related to dollar sales over the two 12-month periods following the sale of the new product introduced in 2012.

The estimated warranty costs are 2% within the first 12 months following the sale and 3% in the second 12 months following the sale. This gives us a total of 5% in warranty costs related to dollar sales.

To calculate the estimated warranty liability, we use the formula:

Estimated Warranty Liability = Total sales × Total sales percentage given - Actual Warranty Expenditures

Substitute in the values we have:

Estimated Warranty Liability = $1,800,000 × 5% - $47,000

Estimated Warranty Liability = $90,000 - $47,000

Estimated Warranty Liability = $43,000

Therefore, Eaton Co. should report an estimated warranty liability of $43,000 at December 31, 2013.

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