In 2011, Ferrari began selling a new line of hybrid cars that carry a three-year
ID: 2509528 • Letter: I
Question
In 2011, Ferrari began selling a new line of hybrid cars that carry a three-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:
First year of warranty- 1%
Second year of warranty- 4%
Third year of warranty- 6%
Sales and actual warranty expenditures for 2011 and 2012 are presented below:
2011 2012
Sales $5,000,000 $9,000,000
Actual warranty expenditures 40,000 280,000
a. Journalize for 2012
b. Show a partial balance sheet regarding warranty at the end of 2011?
c. Show a partial balance sheet regarding warranty at the end of 2012?
Show work please
Explanation / Answer
(a) Cost of warranty for 2012
warranty cost for in relation to 2011 sales = Sales in 2011 * 2nd year % age
= $5000000* 4% = 200000
warranty cost for in relation to 2012 sales = Sales in 2012 * 1st year % age
= $9000000* 1% = 90000
Total cost for 2012 = 200000 + 90000 = 290000
Warranty cost a/c dr 290000
to provision for warranty 290000
provision for warranty a/c dr 280000
to service/material 280000
(b) Extract of Balance Sheet for 2011
Provision of warranty 10000 credit (500000*1% - 40000)
(b) Extract of Balance Sheet for 2012
Provision of warranty 20000 credit (50000 - 40000 + 290000 - 280000 )
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