Question

Scotty Pty Ltd provides a 12-month warranty on building work performed by the entity. On 1 January 2016, there was a credit balance of 75,200 in its warranty provision account. During the year ended 31 December 2016, Scotty Pty Ltd incurred 79,700 servicing warranty claims. All of the warranty costs were in the form of labour costs. During the year ended 31 December 2016, Scotty Pty Ltd’s revenue from building contracts was 7,620,000. Warranty liabilities are estimated as 1% of building revenue for the previous 12 months. Required Prepare journal entries to record: (a) warranty claims during the period (b) adjustments to the warranty provision account at 31 December 2016. (Enter debit entries first followed by credit entries.Please include Dr and Cr as appropriate. Narrations are not required).

Answer 1

	JOURNAL ENTRIES
	Accounts	Debit	Credit
1	Warranty expense A/c Dr	$    76,200
	To provision for warranty		$    76,200
	The provision created for the period ,1% of 7620000 recorded.
2	Provision for warranty A/c Dr	$    75,200
	To labor costs		$    75,200
	( Adjustment of cost incurred to provision recorded
3	Labor cost A/c Dr	$    79,700
	To Cash		$    79,700
	(journal entry for labor cost incurred recorded in books