Question

Scotty Pty Ltd provides a 12-month warranty on building work performed by the entity.   

On 1 January 2016, there was a credit balance of 82,200 in its warranty provision account.

During the year ended 31 December 2016, Scotty Pty Ltd incurred 86,700 servicing warranty claims.

All of the warranty costs were in the form of labour costs.

During the year ended 31 December 2016, Scotty Pty Ltd’s revenue from building contracts was 6,820,000.

Warranty liabilities are estimated as 1% of building revenue for the previous 12 months.

Required   

Prepare journal entries to record:   

(a) warranty claims during the period   

(b) adjustments to the warranty provision account at 31 December 2016.

  

(Enter debit entries first followed by credit entries.Please include Dr and Cr as appropriate. Narrations are not required).

Answer 1

Dear Reader/Student,

The answer is as under assuming labour charges are variable:

A)-Warranty claims during the period (Date of entry posted is when warranty claims are made)

Dr_Warranty provision account (Grouped in provisions under liability head in balancesheet)_82,200/-

Dr_Warranty expense account (Grouped under indirect expense head in P&L)_4,500/-

Cr_Labour charges on warranty work account (Grouped in accrued expenses under liablity head in balancesheet)_86,700/-

&

Dr_Labour charges on warranty work account (Grouped in accrued expenses under liablity head in balancesheet)_86,700/-

Cr_Cash or Bank account_86,700/-

B)-Adjustments to the warranty provision account at 31 December 2016.(Date=December 31, 2016)

Dr_Warranty expense account (Grouped under indirect expense head in P&L)_68,200/-

Cr_Warranty provision account (Grouped in provisions under liability head in balancesheet)_68,200/-

Kind Regards