A company sells its product subject to a warranty that covers the cost of parts

Question

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 5% of sales. During the month of July, the company performed warranty work and used $11.000 of parts to perform the warranty work. Sales for July were $450,000. Record the warranty expense for the month of July. Record the costs of the warranty work completed in June. If the Estimated Warranty Liability account had a credit balance of $10,000 on May 31. what is the account balance at June 30? Include & label your computations.

Explanation / Answer

Ans:

To calculate the warranty expense, first figure out how many products will need repair or replacement:

Total numbers of units sold X Percentage of units that are defective

= $450,000 * 5% /100

= $22,500.

Date

Accounts

Debit

Credit

1

Warranty expenses

$9000

$9000

2

Costs of warranty work

$11,000

$11,000

3

Estimated warranty Liability

$10,000

$10,000

Date

Accounts

Debit

Credit

1

Warranty expenses

$9000

$9000

2

Costs of warranty work

$11,000

$11,000

3

Estimated warranty Liability

$10,000

$10,000

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