Question

A company sells its product subject to a warranty that covers the cost of parts and labour for repair during the six months after sale. The warranty costs are estimated to be 3.5% of sales for parts, and 1.5% of sales for labour. During the month of June, the company performed warranty work and used $8,000 worth of parts and paid $4,000 in wages for labour to do the warranty work. Sales for June amounted to $450,000.

Required

1. Prepare the journal entries:

- an estimation of the warranty

- a year-end entry for the warranty

2. If the Estimated Warranty Liability account had a $10,000 credit balance on May 31, calculate the account balance as of June 30?

Answer 1

Q-1) Journal entry (Warranty estimation)

Date	Particulars	Debit ($)	Credit ($)
30-Jun	Warranty expense	12,750
	Estimated Warranty Liability		12,750
	(To record warranty liability)

Note- It is assumed the proportion of Sale of part and Sale of labour in a sale is 8:4, Hence the Sale of June ($450,000) has been bifurcated as Sale of part (300,000) and Sale of Labor (150,000).Based on these sales figure the warranty liability is computed as 3.5% on 300,000 + 1.5% on 150,000 which equals $12,750

Journal entry (Year end entry for warranty)

Date	Particulars	Debit ($)	Credit ($)
30-Jun	Estimated Warranty Liability	12,000
	Cash		12,000
	(To record cash expended for fulfilling warranty obligations)

Note- The actual warranty cost incurred is the year end adjusting entry.

Q-2)Estimated Warranty Liability as on June

Particulars	$
Estimated Warranty Liability as on May 31	10,000
Add-Estimate liability of June	12,750
Less- Actual cost of warranty work performed	(12,000)
Estimated Warranty Liability as on June 30	10,750