Question

Sage Hill Inc. sells products that carry a two-year warranty. Any defective product is replaced with a new item taken from inventory. Management believes that this is the most cost-effective way to deal with any defects or customer complaints. Estimates of claims are expected to be 3 out of every 100 units sold. The units sell for $22 and cost $12. All sales are on account, and the 13% HST is not included in the selling price.

Sage Hill has a calendar year end and uses a perpetual inventory system.

Prepare journal entries for the following transactions:

1.		Sales on account for 4,800 units + HST
2.		Year-end accrual for warranty expense
3.		Replacement of 41 units under warranty

Answer 1

		Debit	Credit
1	Cash /Sundry debtors account Dr (4800units*$22 )+13%	$119,328
	To Sales account 4800 units *$22		$105,600
	*To HST @13% $105,600 *13%		$13,728
	(sales of 4800 units with HST @13%)
2.	**Warranty Expense ((4,800/100units)*3units)*$12	$1,728
	To Warranty Liability or Warranty Reserve		$1,728
	(Warranty expense recorded)
3.	Warrant Liability or Warrranty Reserve 41units *$12	$492
	To Inventory		$492
	(Replacement of 41 units under warranty claims)

Note:

* HST = sales value * 13%

** Warranty expense = ((Number of units sold/100 units) *3 units)*cost per units.

1. provision need to be created on the basis of cost of inventory, not based on sale value because company replacing the units.