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During 2017, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 4% within
- During 2017, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 4% within 12 months following sale and 6% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2017 and 2018 are as follows:
Actual Warranty
Sales Expenditures
2017 $ 400,000 $8,000
2018 600,000 14,000
$1,000,000 $22,000
- At December 31, 2018, (assuming the accrual method) what amount should be reported as an estimated warranty liability?
- Why are warranties recorded as an expense in the year of the sale, i.e., what accounting principle applies?
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