6. A company sells its product subject to a warranty that covers the cost of par
ID: 2452351 • Letter: 6
Question
6. A company sells its product subject to a warranty that covers the cost of parts for repairs during the six months after the date of sale. Warranty costs are estimated to be 2% of sales. During the month of June, the company performed warranty work and used $15,000 worth of parts to do the warranty work. Sales for June amounted to $560,000.
a. Calculate the warranty expense for the month of June.
b. If the Estimated Warranty Liability account had a credit balance of $28,000 on May 31, what is the account balance at June 30?
Explanation / Answer
Warranty Expense and Warranty Liability- Warranty liability and warranty expenses should be recorded at the time of sale of products or services rendered. To record the liability as per accrual principle following two conditions should be met to record the liability.
(‘1) Warranty claim is probable
(‘2) The amount can be reasonably estimated.
(‘a)
Particulars
Amount
Sales for June
$560,000
Estimated Warranty Percentage
2% of sales
Warranty Expense for June ( 560,000 x2 %)
11,200
Warranty expense for the June = $11,200
(,b) Warranty liability at the end of June
Particulars
Amount
Beginning Balance
28,000
Add: Liability created in the month
11,200
Less: Warranty reduced for claims received in the month
15,000
Ending Warranty Liability
24,200
Accounting will be done as under
Sr No
Account Titles
Debit
Credit
]1
Warranty Expense
11,200
Accrued Warranty Liability
11,200
To record the warranty liability for June
2
Accrued Warranty Liability
15,000
Cash
15,000
To record the claims of warranty received in the month of June
Particulars
Amount
Sales for June
$560,000
Estimated Warranty Percentage
2% of sales
Warranty Expense for June ( 560,000 x2 %)
11,200
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