Question

Vaughn Company sells a machine for $7,440 with a 2-year warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 480 machines in 2017 (warranty cost is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the warranty cost is $343 per machine ($152 parts and $191 labor).

Required: Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made in 2017 relating to the warranty?

Answer 1

Solution:

A) Under the Expense- Warranty accrual method:

Sl.no	Journal	Debit	Credit
1.	Cash	$3,571,200
	Sales Revenue ( 480 machines x $7,440 per unit)		$3,571,200
	(Being sale of machine in 2017)
2.	Warranty Expense	$ 82,320
	Inventory ( $152 x 480 x 50 %)		$36,480
	Salaries and Wages Payable ( $191 x 480 x 50%)		$45,840
	( Being half of warranty costs incurred in 2017)
3.	Warranty Expense	$ 82,320
	Warranty Liability		$ 82,320
	( Being warranty expense charged to revenues in 2017 as per accrual method)
4.	Warranty Liability	$ 82,320
	Inventory ( $152 x 480 x 50 %)		$ 36,480
	Salaries and Wages Payable ( $191 x 480 x 50%)		$ 45,840
	( Being warranty costs incurred in 2018)

B) Under the Cash- Basis method:

Sl.no	Journal	Debit	Credit
1.	Cash	$3,571,200
	Sales Revenue ( 480 machines x $7,440 per unit)		$3,571,200
	(Being sale of machine in 2017)
2.	Warranty Expense	$ 82,320
	Inventory ( $152 x 480 x 50 %)		$36,480
	Salaries and Wages Payable ( $191 x 480 x 50%)		$45,840
	( Being half of warranty costs incurred in 2017)
3.	Warranty Expense	$ 82,320
	Inventory ( $152 x 480 x 50 %)		$ 36,480
	Salaries and Wages Payable ( $191 x 480 x 50%)		$ 45,840
	( Being warranty costs incurred in 2018)