Question

Fitwalker sells its activity tracking device to consumers. Each device has a 2-year manufacturers warranty for defects. The company expects that 3% of the units sold will prove to be defective in the first year that it is sold. The cost to repair each Fitwalker is $50. The company sold 10,500 units in 2016. The actual cost of the repairs were $8,300 in 2016 and 7,450 in 2017.

How many units does Fitwalker expect to be defective?

Calculate the warranty provision and expense to be recorded at the end of 2016.

Prepare the journal entries to record the warranty transactions for 2016 and 2017.

Explain what the warranty provision represents, answering why does Fitwalker need to record this in their financial statements? Why does the provision provide information to the financial statement users. Why Fitwalker does not need to record revenue for this type of warranty. In what circumstance would they need to record revenue for a warranty?

Answer 1

1)units=10500*3%=315
2) 2016 warranty provison=415*50=$15750
actual expense=8200
3)
Warranty expnese(db)15750
warranty payable(cr)15750

warranty payable(db)8500
cash(Cr) 8300

2017
Waranty payable(db)7450
cash(Cr)7450

4)Warranty provision tells how much warranty expense the company is expecting and this gives the investors the liability they are holding. This helps to estimate the income statement and cash flow statement to the public. They do not record any revenue here as the warranty is covered in the sales price of the product and it is not separate. If they sold the extended 2 years warranty as separate product to customers then we can recognize revenue