Myron, Inc. manufactures and sells computer monitors with a three-year warranty. Warranty costs are expected to average 7% of sales during the warranty period. The following table shows the sales and actual warranty payments during the first two years of operations:
2016
Sales: $500,000
Warranty Payments: $4,500
2017
Sales: $800,000
Warranty Payments: $40,000
Based on these facts, what amount of warranty liability should Myron, Inc., report on its balance sheet at December 31, 2017?
A) $59,500
B) $$46,500
C) $87,500
D) $91,000
Answer : B) $$46,500
[($500,000 + $800,000) x .07] - $4,500 - $40,000 = $46,500
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