Question

Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2016. Based on an analysis of customer complaints made over the past two years, the cost of a warranty program was estimated at 0.4% of sales. During 2016, sales totaled $4,331,000. Actual costs of servicing products under warranty totaled $21,400.

a) Use the horizontal model to show the effect of having the warranty program during 2016

b) What type of accrual adjustment should be made at the end of 2016?

Answer 1

ANSWER

Prist Co.
All Amounts in $
a.				Warranty Liability A/c
	To Cash A/c			21,400		By Warranty Expense A/c					17,324
	To Balance c/fd			4,076
b.	Accrual Adjustment at the end of 2016 will be 0.4% of Sales of $ 4,331,000  or $ 17,324 less actual expenses of $ 21,400

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