Kohl Company provides warranties for many of its products. The January 1, 2007,
ID: 2434856 • Letter: K
Question
Kohl Company provides warranties for many of its products. The January 1, 2007, balance of the Estimated warranty Liability account was $35,200.00. Based on an analysis of warranty claims during the past several years, this year's warranty provision was established at 0.4% of sales. During 200, the actual cost of service products under warranty was %15,600, and sales were $3,600,000.a. what amount of Warranty Expense will appear on Kohl Co's income statement for the year ended December 31, 2007?
b. What amount will be reported in the Estimated warranty Liability account on December 31, 2007?
Explanation / Answer
Recall that Warranty Liability is a permanent (balance sheet) account with a normal credit balance. It is not closed at the end of the accounting period. It is credited based on estimates of warranty liability in the period that products are sold (to prevent a violation of the matching principle, in this case matching warranty liabilities with the sales and corresponding warranty contracts that generated them) and it is debited based on the actual payment of warranty claims.Warranty Expense is a non-permanent (income statement) account with a normal debit balance that is closed each accounting period. It is debited based based on estimates of warranty liability in the period that products are sold (also to prevent a violation of the matching principle, in this case matching warranty expenses with the sales and corresponding warranty contracts that generated them) and credited only to reverse or modify previous entries or to close the account.
At the beginning of 2007, the Warranty Liability account has a credit balance of $35,200. This means the company expects to pay out $35,200 in warranty claims going foreword for sales it made in previous years. The company already recorded the $35,200 in expense related to these liabilities because of the matching principle. (No journal entry)
In 2007, we have that there were sales of $3,600,000, and the company's estimated warranty expense was 0.4% (.004). This means that the company believes that it will to pay out $14,400 in warranty claims on these sales (3600000 x .004). To prevent a violation of the matching principle, a $14,400 debit would be made to an account titled Warranty Expense and a $14,400 credit to the Warranty Liability account. DR CR
Warranty Expense 14,400
Warranty Liability 14,400 In 2007, we also have that the company paid out $15,600 in warranty claims. These claims may be from 2007 or previous years. We don't know, and it's not important. These claims do not represent an expense because a debit was already made to the Warranty Expense account for both this year and the previous years. What we do know is that these claims involve a $15,600 debit to the Warranty Liability account and a $15,600 credit to some other asset account (perhaps parts to replace defective ones). DR CR
Warranty Liability 15,600 Parts (or other asset accounts) 15,600
Here's a t-account: WARRANTY LIABILITY DR CR 35,200 (beg bal from end of 06)
15,600 (warranty claims paid in 07) 14,400 (est warranty liability for 07) _______________________________ 34,000 (end bal for 07) So the answer for part a should be $14,400, and the answer for b should be $34,000.
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