Question

Gadget Limited offers a one year 'post back' warranty on all of the souvenir items that it sells to customers. Whereby, if the items are faulty as per the conditions of the warranty, customers can post back the item to Gadget Limited for full repairs or replacement (ignore GST): Beginning balance of "Warranty provision" as at 1st January 2020: $25,000 Of the total warranty claim costs, 65% were wages costs, and the remainder being inventory parts costs. Total wages costs in relation to warranty claims during the year. $13,000 Total sales for the year ended 31st December 2020: $750,000 At 31st December 2020, Trinket Limited estimated its liability for unexpired warranty contracts stands at 2% of total sales during the year. (a) Prepare the necessary journal entries to update the warranty provision as at 31st December 2020. Show the warranty provision General Ledger T-account as at 31st December 2020 after all the necessary journal entries and updates have been made.

Answer 1

Q.1 Journal Entries

Journal Entries
Date	Accounts	Debit	Credit
31-Dec-20	Warranty Provision Account	20000
	Wages	13000	13000
	Cost of goods sold	7000	7000
(Being expense incurred toward warranty is transferred to warranty provision account at year end. $ 13000 being wages and $7000 is inventory parts which were debited to wages and cost of goods respectively)
31-Dec-20	Provision for warranty expense	15000
	Warranty Provision Account		15000
(Being warranty provision created for current year @ 2% of sales of 750000)

Note : We have been asked to provide for warranty obligation in respect of sales made during the year and nothing is mentioned that whether warranty provision account balance is sufficient for warranty obligation for sales made during the past hence it is kept as it is and accordingly year end provision is created totally new.

Q.2 T Account - Warranty Provision Account

Warranty Provision Account
For the period 1st Jan 2020 to 31st Dec 2020
Date	Account	Debit	Date	Account	Credit
31-Dec-20	Cash	13,000	1-Jan-20	Opening Balance	25,000
31-Dec-20	Inventory (13000*35/65)	7,000	31-Dec-20	Provision for warranty expense	15,000
31-Dec-20	Balance Carried forward	20,000
		40,000			40,000