Question

QUESTION ONE PART A New Century Equipment Ltd offers a 12-month warranty for the sale of used equipment. On 1 July 2015, there was a credit balance of $95 000 in its Warranty Provision account. During the year ended 30 June 2016, New Century Equipment Ltd incurred $105 000 in warranty costs, of which $55 000 was in the form of inventory and $50 000 was for labour costs. At 30 June 2016, New Century Equipment Ltd estimated its liability for unexpired warranty contracts as $90 000. REQUIRED: (a) Prepare journal entries to record warranty claims during the period and end-of-period adjustments to the Warranty Provision account. (Hint: Credit Wages Payable for the labour costs. Narration is not required) (b) Why do entities offer a warranty? What are the implications for financial reporting when warranty is offered?

Answer 1

Part A: New Century Equipment

(a)

Date	Account Titles and Explanation	Debit	Credit
2016	Warranty provision	105000
	Inventory		55000
	Wages payable		50000
30 June 2016	Warranty expense*	100000
	Warranty provision		100000

Working:

Warranty Provision
Beg. Bal.		95000
Warranty claims	105000	100000	Warranty expense
End. Bal.		90000

(b) Entities offer warranties to attract customers. Warranties take care of repairs that may arise during the period of the warranty granted without any additional cost burden on the customer. Thus, products with warranty clause is more attractive to a customer than products without a warranty.

When a warranty is offered, a warranty liability and expense is required to be recognized in the financial reports in order to comply with the matching principle.

Per HOMEWORKLIB RULES, the first part has been answered. Please post each of parts B and C which are independent questions separately. Thank you.