Question

Woodmier Lawn Products introduced a new line of commercial sprinklers in 2020 that carry a one-year warranty against manufacturer's defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 2% of sales. Sales of the sprinklers in 2020 were $2.7 million. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product: Debit Credit General Journal Accrued liability and expense Warranty expense (2% $2,700,000) Warranty liability 54,000 54,000 Actual expenditures (summary entry) Warranty liability Cash 24,000 24,000 In late 2021, the company's claims experience was evaluated and it was determined that claims were far more than expected—3% of sales rather than 2%. Required: 1. Assuming sales of the sprinklers in 2021 were $3.8 million and warranty expenditures in 2021 totaled $90,000, prepare any journal entries related to the warranty. 2. Assuming sales of the sprinklers were discontinued after 2020, prepare any journal entry(s) in 2021 related to the warranty.

Answer 1

Woodmier Lawn Products Requirement 1 Journal Enteries Date Particulars Warranty expense a/c Dr. To Estimated warranty liability (Warranty estimated) (3% x $3,800,000) Debit in $ Credit in $ 114000 114000 90000 Estimated warranty liability a/c Dr. To Cash, wages payable, parts and supplies, etc. 90000 Requirement 2 Journal Enteries Date Particulars Debit in $ Credit in $ Estimated warranty liability a/c Dr. 30000 Warranty expense a/c Dr. 27000 To Cash, wages payable, parts and supplies, etc. 57000 (Warranty estimated) ($54,000 - $24,000) (3% -2%) < $2,700,000 3% x $2,700,000) - $24,000 = $52,000