Question

MoTown Appliances sells built-in ranges for $ 1,400 each. The price includes a two-year warranty. During 2019, the company sells 1,650 ranges. On the basis of past experience, approximately 4% of units sold will require warranty replacement at an average cost of $ 450 per unit. The actual warranty costs paid by MoTown during 2019 for replacement was $ 25,000.

Instructions:

a) Prepare adjusting journal entries to record the estimated warranty expense and the warranty payments during 2019 at December 31, 2019.

b) Assuming the warranty liability account has an unadjusted credit balance of $ 900, what is the 2019 ending balance ( after adjustment )?

Answer 1

In the books of Motown Appliances

JOURNAL ENTRY

Debit $ Credit $

a) i) Warranty Expense A/c......................................................................................... 29,700

To Estimated Warranty Payable A/c..................................................................................................29,700

(Being the warranty payable estimated and liability created)

ii) Warranty Payable A/c..........................................................................................25,000

To Cash A/c......................................................................................................................................25,000

(Being actual warranty expenses paid and liability of warranty payable reduced)

   Working Note:

Estimated Warranty Payable = 1650 * 4% * $ 450 per unit = $29700

b) Assuming that warranty liability account has unadjusted credit balance of  $ 900 this balance will increase by the liability created in 2019 and reduce by the actual warranty expense paid.

So 2019 ending balance after adjustment = $ 900 Cr. + $ 29700 Cr. - $ 25,000 Dr. = $ 5600 Cr. balance