During Year 1, Ward Company introduced a new product carrying a two-year warranty against defects, which is included in the selling price of the product. The estimated warranty costs are 2% of sales within the first 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31 of Year 1 and Year 2 follow. Actual Warranty Sales Expenditures Year 1 $1,200,000 $18,000 Year 2 2,000,000 60,000 $1,600,000 $39,000 Required a. Record the entries in Year 1 to (1) record actual cash warranty costs and (2) accrue for warranties at year-end. Date Account Name Dr. Cr. a. Dec. 31 Year 1 To record actual warranty costs. Dec. 31 Year 1 To accrue for warranty expense. b. At December 31 Year 1, what would Ward report as estimated warranty liability on its balance sheet? $Answer c. Record the entries in Year 2 to (1) record actual cash warranty costs and (2) accrue for warranties at year-end. Date Account Name Dr. Cr. Dec. 31 Year 2 To record actual warranty costs. Dec. 31 Year 2 To accrue for warranty expense.
During Year 1, Ward Company introduced a new product carrying a two-year warranty against defects, which is included in the selling price of the product. The estimated warranty costs are 2% of sales within the first 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31 of Year 1 and Year 2 follow.
| Actual Warranty | ||
|---|---|---|
| Sales | Expenditures | |
| Year 1 | $1,200,000 | $18,000 |
| Year 2 | 2,000,000 | 60,000 |
| $1,600,000 | $39,000 |
Required
a. Record the entries in Year 1 to (1) record actual cash warranty costs and (2) accrue for warranties at year-end.
| Date | Account Name | Dr. | Cr. |
|---|---|---|---|
| a. Dec. 31 Year 1 | |||
| To record actual warranty costs. | |||
| Dec. 31 Year 1 | |||
| To accrue for warranty expense. |
b. At December 31 Year 1, what would Ward report as estimated warranty liability on its balance sheet? $Answer
c. Record the entries in Year 2 to (1) record actual cash warranty costs and (2) accrue for warranties at year-end.
| Date | Account Name | Dr. | Cr. |
|---|---|---|---|
| Dec. 31 Year 2 | |||
| To record actual warranty costs. | |||
| Dec. 31 Year 2 | |||
| To accrue for warranty expense. |
d. At December 31 Year 2, what would Ward report as estimated warranty liability on its balance sheet?
The warranty expense is estimated on the basis of past year experiences. The warranty expense is estimated at the time of sales and recorded as expense as and when sales are incurred. The actual warranty expense is deducted from the estimated warranty costs to get the balance for warranty liabilities.
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