Question

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.

Answer 1

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