Question

Caldor Health accrued $140,000 for a warranty liability related to sales made in 2020. Warranties cover defects for 2 years from the date of sale. Claims in 2020 were $60,000 and in 2021 were $70,000. Warranty expense fro 2020 and 2021 are:

A) $60,000 and $70,000

B)$60,000 and $80,000

C)$140,000 and $0

D)$140,000 expense and $10,000 income

Please give specific reason for every choice that why it is correct and why it is wrong if you can. Thank you so much!!!!!

Answer 1

The correct option is (c).

Warranty expenses are estimated costs which a company might incur to repair or provide replacement for goods sold. These warranty expenses are calculated based on certain assumptions and estimations and such expected costs usually differ from actual costs. Under the accrual accounting concept and as per the matching principle, expenses pertaining to the period of sale of goods are recorded in the same period in which the revenue is recorded. These expenses are recorded as accrued warranty expense which means that recording expenses now which are expected to be incurred in future.

In year 2020, the entry to record accrual of warranty liability will be:

Warranty Expense A/c Dr. $140,000

Warranty Liability A/c $140,000

Hence, entire amount will be expensed in year 2020.

The entry to record warranty claims will be:

Warranty Liability A/c Dr. $60,000

Bank A/c $60,000