Question

The company sells an industrial line of products that are all subject to a 3-year warranty. Prior experience has resulted in an average warranty cost of 3% of revenue for its products. The company had an accrued warranty liability of $500,000 at December 2018. During January of 2019, product sales were $6 million, and the actual warranty costs incurred were $145,000.

a. Prepare journal entries to record product sales (assume all credit sales), the warranty accrual, and actual warranty costs incurred in January of 2019.

b. Show a T-account with for the transactions in the Estimated Warranty Liability account for January, with the correct ending balance for this liability.

Answer 1

(A) Entry for recording Credit sales:

Accounts Receivables Debit $ 6,000,000

To Sales Credit   $ 6,000,000

(Being sales made for January on credit basis)

(B) Entry for recording Warranty Accrual for January 2019

Profit and loss     Debit $ 180,000

To Accrued Warranty Liability    Credit   $ 180,000

(Accrual of Warranty 3 % of Sales)

(C) Entry for recording Actual Warranty Costs:

Warranty expenses    Debit $ 145,000

To Warranty Liability Payable Credit $ 145,000

Note: This may be paid in cash or any other manner which may include Expenses on Rework of Product

( Liability for Actual Warranty expenses )   

(D) Entry for Transfer of Actual Warranty Costs:

Accrued Warranty Liability    Debit $ 145,000

To Warranty expenses Credit $ 145,000

( Transfer of Warranty expenses from provision )

Accrued Warranty Liability Account (January)

Particulars	Amount	Particulars	Amount
To Warranty Expenses	$ 145,000	By Balance b/d	$ 500,000
To Balance C/d	$ 535,000	By Profit and Loss	$ 180,000

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