Question

Duplot Awning Corporation introduced a new line of commercial awnings in year 1 that carry a two- year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 2% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Sales = $4,361,000

Actual Warranty Expenditures = $21,805

Required:

1. Does this situation represent a loss contingency? Why or why not? How should Duplot account for it?

2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during year 1.

3. What amount should Duplot report as a liability at December 31, year 1?

Answer 1

1) Duplot has to account for the warranty liability in the balance sheet as it is liable to warranty claims raised by the customers in their respective warranty period.

The revenue received by the company is accounted for under a straight-line basis to meet the expenses of warranty claims of awnings by Duplot.

Sales for the year 1 = 4,361,000

Estimation of warranty liability by Duplot

= 2% * 4361000

= $87,220

The actual amount of expenditure incurred by the company for the year 1 = 21,805

Balance at the year-end

= 87220-21805

= $65,415

Warranty Liability

Expenditures for the year $21,805	Estimated expense for the year $87,220
	Balance as on Dec 31, $65,415

The amount of $65,415 is reported as warranty liability in the liabilities column of the year balance sheet.

2)

Date	Particulars	Debit ($)	Credit ($)
	Warranty expense (2% of 4361000)	87,220
	Estimated warranty liability		87,220
	Estimated warranty liability	21805
	Cash, wages payable, parts and supplies		21805

3) Warranty Liability

Expenditure for the year $21,805	Estimated expense for the year $87,220
	Balance as on Dec 31. $65,415