Question

Natty Music Limited sells musical instruments. The musical instruments are sold with a warranty for replacement of parts and labour. The estimated warranty cost, based on experience, is 4% of sales the year after the sale, 2% of sales the second year after the sale and 1% of sales the third year after the sale. The company’s total sales for 2015 were $4.8 million. Replacement parts and labour for warranty work completed in 2015 totalled $154,000. The expense method is used to account for the warranty costs. The balance in the account related to warranties on January 1, 2015 was: Warranties Liability of $98,000.

Required:

1. Prepare the journal entries for the warranty accrual at year end in 2015 and the actual warranty costs incurred using the expense method

Show all calculations.

2. Determine the amounts that will be shown on the 2015 Income Statement and Balance Sheet for warranties

C. NOW FOR THIS PART ONLY, assuming the company had used the revenue method. It established that of the $4.8 million of revenue from musical instruments, $1 million represented the estimated warranty. What ‘would be! the Warranty expense recorded in 2015? (1 mark)

Answer 1

Date	Journal entries	Dr	Cr
ans 1
2015	Estimated warranty expenses (4800000*(4%+2%+1%))	336000
	Estimated Warranty Liability		336000
2015	Estimated Warranty Liability	154000
	Cash		154000
	(being actual warranty expenses recporded)
ans 2
	Income statement
	Expenses
	Estimated warranty expenses	336000
	Balance Sheet
	Liabilities
	Estimated Warranty Liability	280000
	(98000+336000-154000)
ans 3	Revenue method-=1000000*7%	70000
	warranty expenses is $70000
	If amny doubt please comment