Question

Claudette, Inc., provides warranties for many of its products. The January 1, 2014, balance of the Estimated Warranty Liability account was $38,500. Based on an analysis of warranty claims during the past several years, this year's warranty provision was estimated to be 0.8 percent of sales. During 2014, the actual costs of servicing products under warranty were $51,000, and sales were $5,300,000.

(a.) What amount of Warranty Expense will appear on the income statement for 2014? (b.) What amount will be reported in the Estimated Warranty Liability account on the December 31, 2014, balance sheet?

Answer 1

a. Amount of Warranty Expense will appear on the income statement for 2014 = $42,000

b. Amount that will be reported in the Estimated Warranty Liability account on the December 31, 2014, balance sheet = Opening balance + Balance added during the year - Actual warranty expenses during the year = $38,500 + $42,400 - $51,000 = $29,900

Journal entry:

Date	General journal	Debit	Credit
Dec 31	Warranty expenses a/c [5,300,000 x 0.8%] To Estimated Warrenty Liability a/c [$5,300,000 x 0.8%] (Being estimated warrenty liability recognised for the year 2014)	$42,400	$42,400
Dec 31	Estimated Warrenty liability a/c To Cash a/c (Being cash paid for product servicing for the year 2014)	$51,000	$51,000

Assumption: Cost of servicing product (Wages etcc..) is been paid in cash.

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