Question

Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2019. Based on an analysis of customer complaints made over the past two years, the cost of a warranty program was estimated at 0.2% of sales. During 2019, sales totaled $4,000,000. Actual costs of servicing products under warranty totaled $21,400. Required:a-1. Use the horizontal model to show the effect of having the warranty program during 2019. Indicate the financial statement effect. (Enter decreases with a minus sign to indicate a negative financial statement effect.)

Answer 1

Cost of warranty program was estimated at 0.2% of sales. Hence accrual provision should be at 0.2% of sales i.e., 0.2% * $4,000,000 = $8,000.

The journal entry to record acrrued warranty expense for the year is as follows:

General Journal
Date	Account title and explanation	debit ($)	credit ($)
Jan 2019	warranty expense	8,000
	estimated warranty liability		8,000
	(to record estimated warranty expense for 2019)

When recording estimated warranty expense for the year, debit warranty expense and credit estimated warranty liability.

the journal entry to record actual cost of warranty is as follows:

General Journal
Date	Account title and explanation	debit ($)	credit ($)
Jan 2019	Estimated warranty liability	8,000
	Warranty expense	13,400
	Cash A/c		21,400
	(to record actual cost of warranty)

When recording actual warranty cost for the year, debit estimated warranty liability , debit warranty expenses (for shortfall) and credit cash for the actual amount paid.

Changes in statement of financial position