Question

Woodmier Lawn Products introduced a new line of commercial sprinklers in 2017 that carry a one-year warranty against manufacturer’s defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 3% of sales. Sales of the sprinklers in 2017 were $2,850,000. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:

Accrued liability and expense
Warranty expense (3% × $2,850,000)	85,500
Estimated warranty liability		85,500
Actual expenditures (summary entry)
Estimated warranty liability	39,330
Cash, wages payable, parts and supplies, etc.		39,330

  
In late 2018, the company's claims experience was evaluated and it was determined that claims were far more than expected—4% of sales rather than 3%.

Required:
1. Assuming sales of the sprinklers in 2018 were $3,950,000 and warranty expenditures in 2018 totaled $98,500, prepare any journal entries related to the warranty.
2. Assuming sales of the sprinklers were discontinued after 2017, prepare any journal entries in 2018 related to the warranty.

Answer 1

1)
Warranty expense (4% x $39,50,000)	$1,58,000
Estimated warranty liability
(To record Accrued liability and expense)
Estimated warranty liability	$98,500
Cash, wages, payable, parts and supplies etc.		$98,500
(To record Actual expenditures)
2)
Estimated warranty liability ($85,500 - $39330)	$46170
Loss on product warranty (4% - 3%] x $2850000)	$28500
Cash, wages, payable, parts and supplies etc.(4% x $2850000) - $39330		$74670
(To record Actual expenditures)