Question

Lindart Ltd traditionally recognises its provision for warranty based on a percentage of defect units estimated by the management. An analysis of the variance between estimated warranty amounts and actual warranties paid during the past 5 years has shown a significant deficiency in the estimates. At the end of the previous year, ended 30 June 2019, the warranty provision liability was estimated at $20,000. However, $44,000 warranty payment was made during the year ended 30 June 2019. In June 2020, the accounting department has carried out an investigation on the company’s warranty program. The results of the investigation has identified the previous estimate as incorrect and the business should be using a percentage of net credit sales to estimate the provision liability balances. This new method estimated that the provision liability should have been $48 000 for the year ended 30 June 2019.

Required:Provide the adjustment journal entry as at 30 June 2020.

Answer 1

Solution. Adjusting Journal Entry

Date	Account Title and Expalanation	Debit	Credit
2019
June,30	Warranty Expense	$28,000
	Provision for Warranty Liability		$28,000
	For recording additional warrant expense

Working Note:

Correct Estimated Warranty Provision for 2019 = $48,000

Less: Inccorect Warranty Provision for 2019.....= 20,000

Additional Warranty Expense Required.............= $28,000

So, Adjusting Journal entry is required for recording additional provision for warranty laibility of $28,000.