Question

We sell 1000 units of inventory during January 2kA at $5k/unit, each warrantied for 2 years. Estimated warranty cost to repair returned units (from repair cost records): $200/unit. Based on experience, we expect 4% returns within a year of the sale date; 6% returns in 2nd year. 2kA actual warranty cost: $110k for the year. 2kB actual warranty cost: $130k. Account for these events using a. the usual method (accrual), and b. the warranty revenue method.

with explanation please

Answer 1

Journal Entries for Warranty Accounting warrantied for 2 years.

a. Cash Dr. $ 5,000,000

to Sales   $ 5,000,000

b. Warranty Expenses Dr. $ 200,000

to Warranty Payable $ 200,000

2kA 2kB

Warranty Payable Dr. $ 110,000 $ 130,000

To Cash $ 110,000 $ 130,000

Closing balance for the year 2kA will be 90,000 (200,000-110,000) and 2kB will be 70,000.(200,000-130,000).