Able Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $10,000 (20%) and $20,000 (80 % ); Year 2: $15,000 (50 %) and $25,000 (50 %). The company's effective interest rate is 4%. Assuming the warranty costs are settled at the end of Years 1 and 2, calculate the estimated warranty liability using the expected cash flow method.
Able Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $10,000 (20%) and $20,000 (80 % ); Year 2: $15,000 (50 %) and $25,000 (50 %). The company's effective interest rate is 4%. Assuming the warranty costs are settled at the end of Years 1 and 2, calculate the estimated warranty liability using the expected cash flow method.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Able Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $10,000
(20 %) and $20,000 (80 %), Year 2 $15,000 (50 %) and $25,000 (50 %). The company's effective interest rate is 4%. Assuming the warranty costs are settled at the
end of Years 1 and 2, calculate the estimated warranty liability using the expected cash flow method.
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