Question

Warranty Expenses A company sells its product subject to a warranty that covers the cost of parts for repairs during the six months after the date of sale. Warranty costs are estimated to be 6% of sales. Sales for June were $450,000. During the month of June, the company performed warranty work and used $12,000 of parts to perform the warranty work. 1. Prepare the journal entry to record the warranty expense for the month of June. The company uses an account called Estimated Warranty Liability. Show your work. 2. Prepare the journal entry to record the costs of the warranty work completed in June. Show your work. Date Account Debit Credit Date Account Debit Credit If the Estimated Warranty Liability account had a credit balance of $10,000 on May 31, what is the account balance at June 30? Show your work!

Answer 1

The required journal entries are:

Date	Particulars	Amount ($)	Credit ($)
1.	Warranty expenses (450,000 X 0.06)	27,000
	Estimated warranty liability		27,000
	(To record warranty expenses for June)
2.	Estimated warranty liability	12000
	Parts Inventory		12000
	(To record costs of warranty work)

Note that since the cost of warranty is less than warranty expenses, parts inventory has been credited in second entry. The warranty expense is incurred by the sale of product and so, recognized in the period of the product is recognized.

3.

Opening balance of estimated warranty liability	10,000
Add: warranty expense during year	27,000
Less: cost of warranty work	12,000
Account balance of warranty	$ 25,000

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