Question

Company sells a machine for $6,800 under a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 500 machines in 2010 (warranty expense is incurred 25% in 2010, 60% in 2011 and 15% in 2012). As a result of product testing, the company estimates that the warranty cost is $380 per machine ($200 parts and $180 labor).

      Required:

Assuming that actual warranty costs are incurred exactly as estimated, prepare the journal entries that would be made under application of the expense warranty accrual method for the following:

             i.      Warranty costs incurred in 2010.                                                          

            ii.      Warranty costs incurred in 2011.                                                           

Answer 1

Journal entries that would be made under application of the expense warranty accrual method
Sale of machinery in 2010 :
Transaction	General Journal		Debit	Credit
a.	Cash		3400000
	To sales revenue			3400000
	(Being sale revenue recorded 500 machines @ 6800)
1) Warranty cost incurred in 2010 :
Transaction	General Journal		Debit	Credit
b.	Warranty expense		47500		(380*25%*500 units)
	To Inventory			25000	(200 * 25%* 500 units)
	To salaries and wages payable			22500	(180 * 25% * 500 units)
	(Being warranty expenses Incurred)
Warranty expense charged against 2010 revenues
Transaction	General Journal		Debit	Credit
c.	Warranty expense		95000
	To warranty liability			95000
Warranty cost incurred in 2011 :
Transaction	General Journal		Debit	Credit
d.	Warranty expense		114000		(380*60%*500 units)
	To Inventory			60000	(200 * 60%* 500 units)
	To salaries and wages payable			54000	(180 * 60% * 500 units)
	(Being warranty expenses Incurred)