What is the balance in the warranty liability account at December 31, 2014 for Alvarado Company?

Explanation:

Alvarado Company sells a machine for $8,050 with a 12-month warranty agreement that requires the company to replace all defective parts and provide the repair labor at no cost to the customers. In 2014, the company sells 540 machines, and the warranty cost per machine is estimated to be $395 ($172 for parts and $223 for labor).

The total warranty cost for Alvarado Company in 2014 is calculated by multiplying the warranty cost per machine by the number of machines sold: $395 x 540 = $213,300. Since only half of these warranty costs occur in 2014, the warranty liability account for 2014 should be half of the total warranty costs, which is $106,650 ($213,300/2).

Therefore, the balance in the warranty liability account at December 31, 2014 for Alvarado Company is $106,650 if the actual warranty costs are incurred exactly as estimated.