Question

Ed’s Athletics sells bicycles and other sports and athletic equipment. Sales and expected warranty claims for the year are as follows:

Item	Unit Sales	Expected Warranty Claims	Cost per Claim
		for Warranty Period
Mountain bikes	300	3 claims per 100 sold	$30
Racing bikes	120	1 claims per 20 sold	75
Snowboards	650	2 claim per 100 sold	20

	Required:
1.	Prepare the entry to record warranty expense for Ed’s for the year.
2.	Conceptual Connection: Why does Ed’s have to record a liability for future warranty claims?

Answer 1

Solution

Ed’s Athletics

1. Determination of warranty expense and the entry:

Warranty Expense –

Mountain Bikes –

3 per 100 sold so for 300 bikes sold warranty claim = (300/100) x 3 = 9

Warranty expense = warranty claim x warranty cost per claim

= 9 x $30 = $270

Racing Bikes –

1 claim per 20 sold, so for 120 bikes sold, warranty claim = 120/20 x 1 = 6

Warranty Expense = 6 x $75 = $450

Snowboards –

2 claims per 100 sold, so for 650 units sold, warranty claim = (650/100) x 2 =13

Warranty Expense = 13 x $20 = $260

Total Warranty Expense for Ed Athletics = $270 + $450 + $260 = $980

The entry to record warranty expense,

Date	Account Titles and Explanation	Ref. No.	Debit	Credit
	Warranty Expense		$980
	Warranty Liability			$980
	(To record warranty expense for the year)

1. Liability for future warranty claims –

Warranties allow businesses to increase sales. Consequently, the cost of repairs and replacement forms a part of the cost of generating sales.

However, warranty replacement or repair might not occur in the same year of sale. But since the management offers warranty for a specific period of time, the company needs to make an estimated provision for the same against the sale revenue. That provision represents warranty liability and warranty expense is written off to the warranty liability as and when claims occur during the warranty period. The warranty liability is a contingent liability and is recorded in the same period of sale.

The warranty liability does not exist beyond the warranty period.