Question

A company sells its product subject to a warranty that covers the cost of parts and labour for repairs during the six months after sale. Warranty costs are estimated to be 4.5% of sales for parts, and 1.5% of sales for labour. During the month of June, the company performed warranty work and used $8,000 worth of parts and paid $4,000 in wages for labour to do the warranty work. Sales for June amounted to $450,000.

(1) What account should be debited for the $4,000 in labour?
(2) What should be the amount of estimated warranty expense for June?
(3) If the Estimated Warranty Liability account had a $10,000 credit balance on May 31, what should be the account balance as of June 30?

Answer 1

(1)Account that should be debited for the $4,000 in labour --is warranty liability a/c

(2)Amount of estimated warranty expense for June=

(450000*(4.5%+1.5%))=

27000

3.Account balance as of June 30 should be

$25,000

as per the Warranty liabilty a/c

Warranty liability a/c
May31, balance		10000
Warranty work done in June	12000
June warranty liability		27000
June 30, balance	25000
	37000	37000