Question

Natty Limited sells custom made jewellery which are sold with a 3 year warranty. The estimated warranty cost, based on experience, is 3% of sales the year after the sale, 2% of sales the second year after the sale and 1% of sales the third year after the sale. The company’s total sales for 2019 were $1.2 million. Actual warranty work were performed in 2019 for a cost of $47,000. The opening balance in the Warranty Liability account as of January 1, 2019 was $60,000.

Required:

a. Prepare the journal entries for the warranty accrual and the actual warranty incurred for 2019 using the Expense Method.

b. What is the amount of the Warranty Liability to be reported on the Balance Sheet as at December 31, 2019 based on the Expense method?

c. NOW assume the Revenue Method. Of the $1.2 million sale, $200,000 represented warranty. $47,000 was incurred in 2019 for warranty work. Prepare the journal entries to record the sale of jewellery, actual warranty work incurred and revenue to be recognized in 2019?

Answer 1

Solution (a)	Journal entries
Date	Account name	Debit	Credit
2019
	Warranty expense (3%*1200000)	36000
	Accrued warranty liability		36000
	(record warranty liability)
	Accrued warranty liability	47000
	Cash		47000
	(record warranty cost incurred)
Solution (b)	Warranty liability to be reported on the balance sheet
		Amount in $
	Opening warranty	60000
	Warranty expense during the year	36000
	Less: warranty claimed	-47000
	Amount to be reported	49000
Solution (c)	Revenue method
	Estimated Warranty Liability
	=36000*200000/1200000
Date	Account name	Debit	Credit
2019
	Cash	1200000
	Warranty expense (3%*1200000)	6000
	Accrued warranty liability		6000
	Deferred warranty revenue		200000
	Sale revenue (1200000-200000)		1000000
	(record sale and warranty liability)
	Accrued warranty liability	47000
	Cash		47000
	(record warranty cost incurred)
Solution (b)	Warranty liability to be reported on the balance sheet
		Amount in $
	Opening warranty	60000
	Warranty expense during the year	6000
	Less: warranty claimed	-47000
	Amount to be reported	19000