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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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During 2019, Lawton Company introduced a new line of machines that carry a 3-year assurance-type warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale.

Sales and actual warranty expenditures for the first 3-year period were as follows:

Chapter 9, Problem 10MC, During 2019, Lawton Company introduced a new line of machines that carry a 3-year assurance-type

What amount should Lawton report as a liability at December 31, 2021?

  1. a. $0
  2. b. $21,000
  3. c. $84,000
  4. d. $105,000

To determine

Calculate the amount that should be reported as a liability by Company L as at December 31, 2019.

Explanation

Liabilities: The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Calculate the amount that should be reported as a liability by Company L as at December 31, 2019.

Liability=(Total sales amount×Total interest rate)Annual warranty expend

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