Question

Original Warranty Review Problem
While attending a trade show in August 2018, Savy Tech, Inc. sold tablets and laptops totaling $40,000. Each product sold came with a 1-year manufacturer’s warranty.
Warranty costs related to the manufacturer’s warranty were estimated to be 5% of sales. As of December 31, 2018 (Savy Tech’s year-end), Savy Tech had paid out $800 in cash
to fix or replace broken products. The Company paid out an additional $1,500 in cash during the first quarter of 2019 to satisfy more warranty claims.

1. Record any necessary journal entries that Savy Tech would need to make in 2018.

2. What amount of warranty liability should Savy Tech report on its December 31, 2018 balance sheet (assuming the company began with a zero balance in this
account in 2018)?

3. Prepare the journal entry Savy Tech would make to record the payment of warranty costs during the first quarter of 2019.

Answer 1

1)

Date	Account title	Debit	credit
2018
a	Cash/Accounts receivable	40000
	Sales revenue		40000
b	Warranty expense	2000
	warranty liability payable		2000
	[Being estimated warranty expense recorded :40000*5%=2000]
c	warranty liability payable	800
	cash		800
	[Being actual expenditure incurred ]

2)Warranty liability to be reported at December 31,2018 = Liability incurred -Liability paid

                                        = 2000 - 800

                                      = 1200

3)

Date	Account title	Debit	credit
2019
a	Warranty expense	800
	warranty liability payable	1200
	Cash		1500