Question

Recording and Reporting Warranties Macy Furniture sells a line of products that carry a three-year warranty against defects at no extra charge. Based on industry experience, the estimated warranty costs are as follows: first year following the year of sale, 1% of sales; second year following the year of sale, 3% of sales, and third year following the year of sale, 5% of sales. Sales and actual warranty expenditures for the first three-year period were: Cash Actual Warranty Expenditures 2020 580.000 $1.000 2021 110.000 4,100 2022 120.000 9.000 Sales 3. Provide entries for the three years for (1) credit sales, (2) estimated warranty expense, and (3) actual expenditures. b. What amount should be reported as a liability on the balance sheet at the end of each year? C. Assume instead that at the end of 2022, the company changed its estimate of the second year after sale to 2% of sales rather than 3%. Provide the entry to record the adjustment to the warranty liability (assuming all entries described above were recorded as planned). Note: Round your answers to the nearest whole dollar.

Answer 1

	Date	Account Name	Dr.	Cr.
1	2020	Cash	80000
		Sales		80000
		Recording of Sales
2	2020	Estimated warranty expenses	7200
		Estimated warranty liability 80000*9%(1%+3%+5%)		7200
		(estimated warranty expenses )
3	2020	Estimated warranty liability	1000
		Cash		1000
		(incurred warranty cost)
1	2021	Cash	110000
		Sales		110000
		Recording of Sales
2	2021	Estimated warranty expenses	9900
		Estimated warranty liability 110000*9%(1%+3%+5%)		9900
		(estimated warranty expenses )
3	2021	Estimated warranty liability	4100
		Cash		4100
		(incurred warranty cost)
1	2022	Cash	120000
		Sales		120000
		Recording of Sales
2	2022	Estimated warranty expenses	10800
		Estimated warranty liability 120000*9%(1%+3%+5%)		10800
		(estimated warranty expenses )
3	2022	Estimated warranty liability	9800
		Cash		9800
		(incurred warranty cost)
B		Estimated warrenty liabily for the first year
		Estimated liability 2020	7200
		Less actual warranty expenses	1000
		Estimated warrenty liabily on 31/12/2020	6200
		Estimated warrenty liabily for the Second year
		Opening balance	6200
		Estimated liability 2021	9900
		Less actual warranty expenses	4100
		Estimated warrenty liabily on 31/12/2021	12000
		Estimated warrenty liabily for the Third year
		Opening Balance	12000
		Estimated liability 2021	10800
		Less actual warranty expenses	9800
		Estimated warrenty liabily on 31/12/2021	13000
C		Adjustment entries	Dr	Cr
	2022	Estimated warranty liability	2400
		warranty expenses		2400
		2%* 120000