Question

In 2018, Cap City Inc. introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 2% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. Sales were $6,800,000 for the first year of the product's life and actual warranty expenditures were $37,000. Assume that all sales are on credit. Required: 1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2018. 2. What amount should Cap City report as a liability at December 31, 2018?

Answer 1

All warranty expenses estimated over the life accrued entirely in the year of sale.

Journal entries

Date	Account	Debit	Credit
Dec 31, 2018	Accounts Receivable	6,800,000
	Sales		6,800,000
	(Sales made in credit)
Dec 31, 2018	Warranty expense (5% of 6,800,000)	340,000
	Liability for warranty		340,000
	(warranty expense estimated over the life accrued entirely in the year of sale)
Dec 31, 2018	Liabilty for warranty	37,000
	Accounts Receivable		37,000
	(Actual warranty for 2018 recorded)

2. Amount of liability as at December 31, 2018

Liability for warranty over the life = 340,000

Less Actual warranty claim for 2018 = 37,000

Closing liability as at Dec 31, 2018 = $303,000

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