Question

Problem #4 (8): Vaughn Company sells a machine for $7,440 with a 2-year warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 480 machines in 2017 (warranty cost is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the warranty cost is $343 per machine ($152 parts and $191 labor). Required: Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made in 2017 relating to the warranty?

Answer 1

WORKING NOTES:
	CALCULATION OF WARRANTY PROVISSION OF THE YEAR
	Total Machine Sales	480 Machine
	Projected Warranty Expenditures = 480 Machine X $ 343 =	$               1,64,640
	Warranty Expenses of the year 2017 = $ 164,640 =	$                  82,320
SOLUTION:
Journal Entries
Date	Account Title and explanation	Debit	Credit
2017	Warranty Expenses	$               1,64,640
	Estimated Warranty Liabilites		$                 1,64,640
	(Warranty liability created for the sale of 480 Machine )
2017	Estimated Warranty Liabilites	$                  82,320
	Parts Inventory( $ 152 X 480 Machine) X 50%		$                     36,480
	Labour Sales ($ 191 X 480 Machine) X 50%		$                     45,840
	(Record the consumption of warranty parts and labour)