Question

Consumer Corp. sells dishwashers and washing machines that come with a two-year unlimited warranty on parts and labour for repairs. The warranty is intended to assure customers that the appliances will operate as advertised. The warranty is expected to cost 2% of sales in the first year and 4% of sales in the second year, for a total of 6%. The provision for warranty has a credit balance of $145,000 at the beginning of 20X5. The following events and decisions relate to the warranty:

20X5		Sales revenue of $4,600,000 was generated from products covered by the warranty. Both the sale and the warranty provision must be recorded.
20X5		Warranty work consumed parts inventory with a cost of $9,000, and labour of $22,000.
20X6		Sales revenue from products covered by the warranty were $6,100,000. Both the sale and the warranty provision must be recorded.
20X6		Sales revenue of $6,100,000 was generated from products covered by the warranty. Warranty work consumed parts inventory with a cost of $126,000, and labour of $289,000

Required:
1. Prepare journal entries for the events listed above. Because of uncertainty of estimates, no discounting is to be applied. Assume all sales are in cash.

2. Calculate the balance of the provision for warranty at 31 December 20X5 and 20X6.

Answer 1

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