1. Boyce Corporation offers a one-year product Warranty and estimates that 3% of

Question

1.              Boyce Corporation offers a one-year product Warranty and estimates that 3% of all products sold will require Warranty services and on average each Warranty service costs $50. Boyce Corporation’s Warranty Liability balance was $26,000 Cr . During 2008, (40,000) products were sold. Boyce Corporation records its Warranty Expense at the end of each year. The cost of all Warranty claims during 2008 amounted to $52,000, half which were Parts and Materials (from the inventory), and other half labor (paid with Cash).

Required:

a.Prepare Journal Entries to record Warranty Expense and Warranty Claims for 2008.

Warranty Expense for 2008

Account

Debit

Credit

Warranty Claims processed

Account

Debit

Credit

Indicate how the Accounts related to Warranties are reported on the Income Statement and the Balance Sheet

List the Accounts by (1) Name, (2) their Type (e.g. Asset, Liability, Revenue, Expense, etc.), (3) the Financial Statement on which they would appear (Balance Sheet or Income Statement) including their classification, and (4) their dollar Balance…and Dr or Cr..

Account

Debit

Credit

Explanation / Answer

1a.

Warranty expense during 2008 = Quantity sold × Estimated rate of warranty × each cost

                                                = 40,000 × 3% × $50

                                                = $60,000

The expense would be debited since this is chargeable during the year, and warranty liability should be credited because of the obligation to meet the liability.

Journal

Date

Account titles and explanation

p.ref

Debit

Credit

2008 end

Warranty expense

$60,000

Warranty liability

$60,000

To record warranty expense for the year ending 2008

Once the warranty is claimed, warranty liability should be debited since the obligation is met; and the credit amount would be inventory and cash.

Inventory amount = Warranty claim × ½ = $52,000 × ½ = $26,000

Cash amount = Warranty claim × ½ = $52,000 × ½ = $26,000

Journal

Date

Account titles and explanation

p.ref

Debit

Credit

2008

Warranty liability

$52,000

Inventory

$26,000

Cash

$26,000

To record warranty claim during the year

List of accounts:

(1)Name

(2) Type

(3) Financial statement

(4) Dollar balance (Dr/Cr)

Warranty expense

Expense

Income statement

$60,000 Dr

Warranty liability

Liability

Balance sheet; current liability

(26,000 + 60,000 =) $86,000 Cr

Warranty liability

Liability

Balance sheet; current liability

(86,000 – 52,000 =) $34,000 Cr

Inventory

Asset

Balance sheet; current asset

$26,000 Cr

Cash

Asset

Balance sheet; current asset

$26,000 Cr

Date

Account titles and explanation

p.ref

Debit

Credit

2008 end

Warranty expense

$60,000

Warranty liability

$60,000

To record warranty expense for the year ending 2008

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