Question

Wheels Inc. manufactures kick scooters. The company offers a one-year warranty on all scooters. During 2019, the company recorded net sales of $2,800 million. Historically, about 3% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 30% of retail value. Assume that at the start of the year Wheels’ balance sheet included an accrued warranty liability of $15.4 million and at the end of the year, the accrued warranty liability balance was $11.5 million.

a) How should Wheels account for warranty claims?

b) Calculate Wheels’ warranty expense for 2019.

c) How much did Wheels pay during the year to repair and or replace scooters under warranty?

Answer 1

a. Warranty claims are met out of the liability created for the purpose, going by past experience in prior years.

b.Warranty expense for 2019 = Sales made*Estimated % to be returned for warranty*% of expense estimated

ie. 2800*3%*30%=

25.2

Mlns.

& recorded by the following journal entry

	Debit	Credit
Warranty expense	25.2
Warranty liability		25.2
( $ 2800 mlns.*3%*30%)
(to record warranty expense for 2019)

Warranty liability ledger a/c
	Debit	Credit
Beginning balance		15.4
Warranty claims settled(Bal.fig.)	29.1
Warranty expense for 2019		25.2
Ending balance	11.5

c) Amount paid by Wheels pay during the year to repair and or replace scooters under warranty

Amt. claimed/met from provision =Beginning Warranty liability+2019 provision-Ending warranty liability

15.4+25.2-11.5=

29.1

mlns.