In: Accounting
C. Clean-All, Inc. sells washing machines with a 3-year assurance type warranty. In the past, Clean-All has found that in the year after the sale, warranty costs have been 3% of sales; in the second year after sale, 5% of sales; and in the third year after sale, 7% of sales. the following data are also available:
Year Sales Warranty Expenditures
2018 650,000 82,000
2019 700,000 85,000
Instructions:
1. Prepare the journal entries for the preceding transactions for 2018-2019. Closing entries are not required.
2. Determine the amount Clean-All will report as liability on December 31, 2019, assuming the liability had a balance of $101,200 on December 31, 2017.
1 | |||
2018 | |||
Debit | Credit | ||
Cash (or Accounts Receivable) | 650000 | ||
Sales revenue | 650000 | ||
Warranty Expense | 97500 | =650000*(3%+5%+7%) | |
Estimated Warranty Liability | 97500 | ||
Estimated Warranty Liability | 82000 | ||
Cash | 82000 | ||
2019 | |||
Debit | Credit | ||
Cash (or Accounts Receivable) | 700000 | ||
Sales revenue | 700000 | ||
Warranty Expense | 105000 | =700000*(3%+5%+7%) | |
Estimated Warranty Liability | 105000 | ||
Estimated Warranty Liability | 85000 | ||
Cash | 85000 | ||
2 | |||
Estimated Warranty Liability,December 31, 2017 | 101200 | ||
Add: Warranty expense, 2018 | 97500 | ||
Add: Warranty expense, 2019 | 105000 | ||
Less: Warranty Expenditures, 2018 | -82000 | ||
Less: Warranty Expenditures, 2019 | -85000 | ||
Estimated Warranty Liability,December 31, 2019 | 136700 |