The Importance of Warranty Liability Calculations for Tamanah Auto Parts Inc.
Calculating Warranty Liability for April:
1. Calculate Estimated Warranty Liability for Parts:
1.5% of $550,000 (April sales) = $8,250
2. Calculate Estimated Warranty Liability for Labour:
3% of $550,000 (April sales) = $16,500
3. Calculate Total Estimated Warranty Liability for April:
$8,250 (parts) + $16,500 (labour) = $24,750
After accounting for the actual costs of $8,700 for parts and $14,000 for labour spent on warranty work in April, the ending warranty liability balance would be:
$24,750 (estimated liability) - $8,700 (parts) - $14,000 (labour) = $2,050 credit
Accurately estimating and recording warranty liabilities is essential for reflecting the company's obligations accurately in the financial statements. This helps in ensuring that the financial statements provide a true and fair view of the company's financial position and performance.