Calculating Estimated Warranty Liability for Sun Angel Corporation

How does Sun Angel Corporation calculate its Estimated Warranty Liability?

Based on the data provided, what factors are taken into consideration?

Calculation of Estimated Warranty Liability:

The Estimated Warranty Liability for Sun Angel Corporation is calculated based on a two-year warranty program that costs 3% of net sales in the first 12 months and 1% of net sales in the second 12 months.

Sun Angel Corporation uses a formula to determine the Estimated Warranty Liability. It takes into account the net sales made under warranty, the percentage of units returned and repaired or replaced, and the cost incurred for repair and replacement.

The formula to calculate the Estimated Warranty Liability is as follows:

Estimated Warranty Liability = (1% + 3% * Net Sales) - Cost of repair and replacement

By applying this formula to the data provided, Sun Angel Corporation arrives at the amount reported on its 2020 year-end balance sheet for Estimated Warranty Liability, which is $2,210,126.