Question

The following information is related to Sunglow Solar Ltd:

• Sales for the year ended 30 June 2019 was $1,200,000
• Provision for warranties before adjustment was $36,000

At 30 June 2019, Sunglow Solar Ltd. adjusted its Provision for Warranties so that it would be equal to 4% of sales for the year ended on that date.

On 16 September 2019, a successful claim for warranty on faulty goods to the cost of $700 was made on Sunglow Solar Ltd.

Required:

1. Prepare the general journal entry at 30 June 2019 to adjust the Provision for Warranties to the required level.
2. Record the payment of the warranty claim on 16 September 2019 in general journal format.

Answer 1

REQUIRED A

A provision for warranty is expensed even though the expense does not occur during the period is due to the matching concept. Acoording to the matching concept An expense should be recognised to its related revenue .

So as the sale comes with a warranty the provision for warranty is made during the period of sales and that is in this question for the year ended 30 june 2019

Sales for the period= $1,200,000

Provision for warranty before adjustment = $36000

New Provision as required by the question = $1,200,000*4% = 48000

An increase in the provision is accounted as

Dr increase profit/loss

Cr Warranty liability account

So increase in provision = $48000 -$36000 =$12000

So the journal entry to record increase in provision is

Dr Warranty Expense $12000

Cr Warranty Liability $12000

REQUIRED B

When a warranty claim is made the warranty liability decreases so its therefore debited and if the claim made is a payment to the customer the cash decreases and therefore credited.If the claim made was to replace the product sold then the inventory would have been credited.

So as per the question $700 of claim was successful and we can assume that the payment was made in cash

The journal entry would be

GENERAL JOURNAL
DATE	ACCOUNTS	REF	DEBIT	CREDIT
16 sept 2019	Warranty Liability		$700
	Cash			$700