Question

In 2018, Simon Corporation began selling a new line of toasters that carry a three-year warranty against defects. Based upon past experiences with similar products, the estimated warranty costs related to dollar sales are as follows:

                  First year after sale                           2%

                  Second year after sale                       4%

                  Third year after sale                          6%

Sales and actual warranty expenditures for 2018, 2019 and 2020 are presented below:

                 

Year	Sales	Warranty Expenditures (costs incurred)
2018	$1,155,000	$   31,750
2019	$1,650,000	$   83,500
2020	$1,750,000	$ 150,500

Instructions:

1. Prepare the journal entries to record the above transactions for the third fiscal year only (the one ending December 31, 2020), including:

1. the initial journal entry to record the sales. Assume all sales are “on account.”
2. The Warranty Expenditures for the year, and
3. The year end adjustment to record the warranty expense.

Assume the company uses the “expense warranty approach” for recording estimated warranty liabilities (like the assignment you handed it). Don’t forget the narratives! And Show Calculations.

2. Calculate the amount that Simon should report as warranty expense on its 2020 income statement.

3. What will be the balance in the “Estimated Warranty Liability” account as at December 31^st 2020? Consider using a “T” account to prove your answer (not mandatory).

Answer 1

Journal entries for the year 2020.

--> Account Receivable 1,750,000

to Sales 1,750,000

(Being Sales on credit for the year)

--> Warranty Expenditure 105,000

to Estimated Warranty Liability 105,000

(Being estimated warranty recorded at 6% of Sales 1,750,000)

--> Warranty Expenditure 45,500

Estimated Warranty Liability 105,000

to Cash 150,500

(Being Warranty exp. actually incurred paid through cash during the year)

--> Warranty expense expected at 6% of sales. i..e 1,750,000*6% = 105,000 for the year 2020. and accordingly for 2019 = 4% of 1650000 = 6,6000 and for 2018 = 2% of 1155000 = 23,100

as calculated above expense actually incurred is higher than all estimated warranty expense thus there will be zero balance in 'estimated warranty liability' account as at Dec, 31st 2020..

For the year 2020 Simon should report warranty expense of 150,500 (actual cost incurred) in it's Income statement.