Question

During 2016, Rao Co. introduced a new line of machines that carry a one-year assurance warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale. Rao spent $39,000 of warranty expenses in 2016.

Sales $ 1,600,000, Actual Warranty Expenditures $ 39,000 Please provide 2016 journal entries associated with the warranty and sale.

Answer 1

2016 Journal Entries :-

	Particulars	Debit	Credit
1.)
	Warranty expense A/c Dr.	80,000
	To Warranty liability A/c		80,000
	(To record the estimated warranty liability for the sales made)
	($1,600,000 sales * 5% estimated warranty liability )
2.)
	Warranty Liability A/c Dr.	39,000
	To Merchandise Inventory A/c		39,000
	(To record the warranty expense for the year 2016)

Please note that we use the 5% rate to calculate the estimated warranty liability because it is a combination of 2% in the year of sale and 3% in the year after the sale.