Question

During 2020, Ward Company introduced a new product carrying a two-year warranty against defects, which is included in the selling price of the product. The estimated warranty costs are 2% of sales within the first 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31, 2020, and 2021 are: EXP Sales 2020 $1,200,000 2021 2,000,000 $3,200,000 Actual Warranty Expenditures $18,000 60,000 $78,000 a. At December 31, 2020, what would Ward report as estimated warranty liability on its balance sheet? $ 0

Answer 1

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Year Estimated Warranty 2% 4% 24,000 $ 48,000 40,000 $ 80,000 Sales 12,00,000 $ 20,00,000 $ 2020 $ 2021 $ Solution a. Estimated warranty liability at Dec 31,2020 $ 24,000 Solution b. Date Dec 31,2020 Credit Debit $ 24,000.00 Account Name Warranty Expense Warranty Liability (To Accrue for warranty expense) Warranty Liability $ 24,000.00 Dec 31,2020 $ 18,000.00 Cash $ 18,000.00 (To record actual warranty cost) Solution c. Estimated warranty liability at Dec 31,2021 ($40000 + $48000) $ 88,000 Credit Debit $ 88,000.00 $ 88,000.00 Solution d. Date Account Name Dec 31,2021 Warranty Expense Warranty Liability (To Accrue for warranty expense) Dec 31,2021 Warranty Liability Cash |(To record actual warranty cost) $ 60,000.00 $60,000.00