Question

1. A company sells its product subject to a warranty that covers the cost of parts and labour for repairs during the six months after sale. warranty costs are estimated to be 3.5% of sales for parts, and 1.5% of sales for labour. During the month of June, the company performed warranty work and used $8,000 worth of parts and paid $4,000 in wages for labour to do the warranty work. Sales for June amounted to $450,000.
   
   a)What account should be debited for the $4,000 in labour?                                              2

b) What should be the amount of estimated warranty expense for June?                           4

c) If the Estimated Warranty Liability account had a $10,000 credit balance on May 31, what should be the account balance as of June 30?                                                            

Answer 1

Req a.
The Estimated Warranty liability is debited for incurring the labour cost of $4000.
Journal entry for incurrence:
Estimated warranty liabilities	4000
Cash account			4000
(for labour cost incurred for warranty)
Req b.
The Estimated Warranty expense for June:
Sales for June			450000
Multiply: Total Warranty cost as % of sales revenue	5%
Estimated warranty expenses		22500
Req c.
Beginning balance of warranty liability	10000
Add: Liabilities for June recognized		22500
Total				32500
Less: Incurred in June (8000+4000)		12000
Estimated warranty liabilities balance on June30	20500