In 2015, Quapau Products introduced a new line of hot water heaters that carry a

Q: In 2015, Quapau Products introduced a new line of hot water heaters that carry a

SOLUTION The fact that claims were less than expected represents a change in estimate.As a result, no adjustments are made to any 2015 financial statements, and the 2016 warranty expense is unaffected by any previous estimates. 2016 Warranty expense = $280,000 * 4% = $11,200 Journal entry to record the expense would be - Warranty expense Dr. 11,200 Estimated warranty liability Cr. 11,200

ID: 2571686 • Letter: I

Question

In 2015, Quapau Products introduced a new line of hot water heaters that carry a one-year warranty against manufacturer’s defects. Based on industry experience, warranty costs were expected to approximate 5% of sales revenue. First-year sales of the heaters were $230,000. An evaluation of the company’s claims experience in late 2016 indicated that actual claims were less than expected—4% of sales rather than 5%. Assuming sales of the heaters in 2016 were $280,000 and warranty expenditures in 2016 totaled $9,200, what is the 2016 warranty expense?

Explanation / Answer

SOLUTION

The fact that claims were less than expected represents a change in estimate.As a result, no adjustments are made to any 2015 financial statements, and the 2016 warranty expense is unaffected by any previous estimates.

2016 Warranty expense = $280,000 * 4% = $11,200

Journal entry to record the expense would be -

Warranty expense Dr. 11,200

Estimated warranty liability Cr. 11,200

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In 2015, Quapau Products introduced a new line of hot water heaters that carry a

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In 2015, Quapau Products introduced a new line of hot water heaters that carry a

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