Milan Company, a manufacturer of heavy machinery, grants a four-year warranty on its products. The Estimated Liability for Product Warranty account shows the following transactions for the year: Opening Balance P45,000 Provision (made at interim dates) 20,000 P65,000 Cost of servicing claims (12,000) Ending balance (before adjustment) P53,000 A review of unsettled claims and the company's experience indicates that claims have averaged 2% of net sales per year. The following additional information is available from the company's records at the end of the current year: Gross Sales P2,040,000 40,000 P1,350,000 Sales returns and allowances Cost of goods sold Requirements: a. Prepare any necessary adjusting journal entries, giving effect to the proper accounting treatment of product warranties. Support any entries with clearly detailed computations. The book shave not been closed. b. Identify the amount of the expense included in the determination of net income and the amount of the liability presented in the balance sheet for warranties.

Milan Company, a manufacturer of heavy machinery, grants a four-year warranty on its products. The Estimated Liability for Product Warranty account shows the following transactions for the year: Opening Balance P45,000 Provision (made at interim dates) 20,000 P65,000 Cost of servicing claims (12,000) Ending balance (before adjustment) P53,000 A review of unsettled claims and the company's experience indicates that claims have averaged 2% of net sales per year. The following additional information is available from the company's records at the end of the current year: Gross Sales P2,040,000 40,000 P1,350,000 Sales returns and allowances Cost of goods sold Requirements: a. Prepare any necessary adjusting journal entries, giving effect to the proper accounting treatment of product warranties. Support any entries with clearly detailed computations. The book shave not been closed. b. Identify the amount of the expense included in the determination of net income and the amount of the liability presented in the balance sheet for warranties.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Question

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Milan Company, a manufacturer of heavy machinery, grants a four-year warranty on its products.
The Estimated Liability for Product Warranty account shows the following transactions for the
year:
Opening Balance
P45,000
Provision (made at interim dates)
20,000
P65,000
Cost of servicing claims
(12,000)
Ending balance (before adjustment) P53,000
A review of unsettled claims and the company's experience indicates that claims have averaged
2% of net sales per year.
The following additional information is available from the company's records at the end of the
current year:
Gross Sales
P2,040,000
40,000
P1,350,000
Sales returns and allowances
Cost of goods sold
Requirements:
a. Prepare any necessary adjusting journal entries, giving effect to the proper
accounting treatment of product warranties. Support any entries with clearly detailed
computations. The book shave not been closed.
b. Identify the amount of the expense included in the determination of net income and
the amount of the liability presented in the balance sheet for warranties.

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