Question

In 2020, Hydrogen Corp. began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:

           First year of warranty 2%

           Second year of warranty 5%

Sales and actual warranty expenditures for 2020 and 2021 are presented below:

                                                                                             2020                               2021

           Sales                                                                     $ 450,000                     $ 600,000

           Actual warranty expenditures 15,000                           30,000

Hydrogen uses the expense approach to account for warranties.

Provide the journal entries for 2020 relating to the above transactions.

Answer 1

Step 1: Computing estimated warranty costs:

Year 2020

Sales = $ 450,000

Estimated Warranty Cost Rate = 2% (First year)

Estimated Warranty Expense = $ 9,000           [$ 450,000*2%]

Year 2021

Sales = $ 600,000

Estimated Warranty Cost Rate = 5% on sales of 2020 (Second year) + 2% on sales of 2021 (First year)

Estimated Warranty Expense = $ 34,500           [($ 450,000*5%) + ($ 600,000*2%)]

Step 2: Journal Entries:

Feel free to ask any clarifications.