2. In 2011, Junghun began selling a new line of hybrid cars that carry a four-ye

Question

2. In 2011, Junghun began selling a new line of hybrid cars that carry a four-year warranty against defects. Based upon past experience with other products, the estimated warrant related to dollar sales are as follows: y costs First year of warranty Second year of warranty Third year of warranty Fourth year of warranty 1% 2% 5% 7% Sales and actual warranty expenditures for 2011 and 2012 are pr esented below: 2012 2011 $7,000,000 $9,500,000 280,000 Sales 80,000 Actual warranty expenditures 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. d. Show a partial income statement regarding warranty for the 2012

Explanation / Answer

Provision for the warranty expenses is as follows:

Journal entry is as follows:

Warranty expense a/c Dr $235,000

To Warranty liabilty account a/c Cr $235,000

(Being provision for i warranty liability created)

For actual expenses entry is  

Warranty liability a/c Dr $280,000

To inventory of spare parts account a/c Cr $280,000

(Being warranty expense recorded).

Answer for question no.b:

For the year 2011 liability as per projection would be 1%*7000000

=70000.

But the acutal warranty is $80,000.

As the balance is in warranties payable a/c is less than the actual warranty expense there will be a debit balance in the liability account.

It is recorded in the current liabilities section with a debit balance.

Answer for question no.c:

Already warranty liability account has a debit balance, to this an additional debit balance gets added. Alredy there is a debit balance of $10,00 to that current year provision is added ie., 235,000. So, the balance in the account is $235000 -$10,000=$225,000 credit balance, but for the current year warranty expense is $280,000.so, the current balance would be $280,000 -$225,000 =$55,000 debit balance.

Answer for quesition no.d:

Year Sales 2012 warranty expense % 2012 warranty expense Current year sales 9500000 1% 95000 Previous year 7000000 2% 140000 Total 235000

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