Question

In 2011, Ferrari began selling a new line of hybrid cars that carry a three-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:

First year of warranty- 1%

Second year of warranty- 4%

Third year of warranty- 6%

Sales and actual warranty expenditures for 2011 and 2012 are presented below:

2011 2012

Sales $5,000,000 $9,000,000

Actual warranty expenditures 40,000 280,000

a. Journalize for 2012

b. Show a partial balance sheet regarding warranty at the end of 2011?

c. Show a partial balance sheet regarding warranty at the end of 2012?

Show work please

Answer 1

(a) Cost of warranty for 2012

warranty cost for in relation to 2011 sales = Sales in 2011 * 2nd year % age  

= $5000000* 4% = 200000

warranty cost for in relation to 2012 sales = Sales in 2012 * 1st year % age  

= $9000000* 1% = 90000

Total cost for 2012 = 200000 + 90000 = 290000

Warranty cost a/c dr 290000

  to provision for warranty 290000

provision for warranty a/c dr 280000

  to service/material 280000

(b) Extract of Balance Sheet for 2011

Provision of warranty 10000 credit (500000*1% - 40000)

(b) Extract of Balance Sheet for 2012

Provision of warranty 20000 credit (50000 - 40000 + 290000 - 280000 )