Question

Warranty Costs Zealand Company sells a motor that carries a 3-month unconditional warranty

against product failure. Based on a reliable statistical analysis, Milford knows that between the sale

and the end of the product warranty period, four percent of the units sold will require repair at an

average cost of $60 per unit. The following data reflect Milford’s recent experience:

October November December Dec. 31 Total

Units sold 23,000 22,000 25,000 70,000

Known product failures from sales in:

October   120 180 160 460

November 130 220 350

December 210 210

Calculate, and prepare a journal entry to record, the estimated liability for product warranties at De-

cember 31. Assume that warranty costs of known failures have already been reflected in the records.

Answer 1

Date	Account Titles and Explanation	Debit	Credit
31-Dec	Product Warranty Expense (1780 x $60)	$      106,800
	Estimated Liability for Product Warranty		$      106,800
	To provide for estimated future warranty expense.
Computation
4% of the units sold  (4% x 70,000)	2800
Known product failures (460+350+210)	1020
Warranty for units sold	1780