Safe-Loc Security Door Corp. introduced a new line of commercial security doors

Question

Safe-Loc Security Door Corp. introduced a new line of commercial security doors in 2016 that carry a four-year warranty against manufacturers defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 4% of sales. Sales and actual warranty expenditures for the first year of selling the product were: Does this situation represent a loss contingency? Why or why not? How should it be accounted for? Prepare journal entries that summarize sales of the security doors (assume all credit sales) and any aspects of the warranty that should be recorded during 2016. What amount should Safe-Loc report as a liability at December 31, 2016?

Explanation / Answer

1 The actual warranty expenditure is not a contingent loss because the warranty liability at the rate of expected warranty claim is recorded as warranty expense and warranty liability at the time of sale itself. So the expenditure is already recorded as expense 2 Journal Entry Account Dr $ Cr $ Sales       7,500,000 Accounts Receivable    7,500,000 Accrued Warranty Laibility        300,000 Warranty Expense           300,000 (recording probable warranty expense and liability                  @ 4% on sales) Accrued Warranty Laibility           124,800 Cash        124,800 3 On Dec 31, 2016 Safe Loc will report remaining balance of (300,000-124,800) = $      175,200 as   Warranty liability

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