Question

Prepare the journal entry(ies)

Warranty

Per our sales contracts, we offer a one-year warranty covering defects in the games. Customers have the option to return the game cartridge for replacement or repair.

Answer 1

	If customer opts to repair the game:
	Warranty expense
	Estimated warranty liabilty
	(The amount which will be recorded is the expense expected to be incured on repairing the game)
	Warranty expense will be recorded in Profit & Loss as an expense
	The estimated expense will be recorded as a liabilty
	If customer opts to replace the game:
	In this case the entity have to replace the game with a new one, which will be from its inventory.
	Estimated warranty liabilty
	Inventory
Imp Note:	The warranty Liability is created at the time of sale.
	This Liability is based on an estimate of the management regarding the percentage of defective products.
	The above 2 entries depicts any increase or decrease in this liabilty