Chapter 7, Problem 7.10E

Exercise 7.10

LO 5

Other accrued liabilities-warranties Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2016. Based on an analysis of customer complaints made over the past two years, the cost of a warranty program was estimated at 0.3% of sales. During 2016, sales totaled $6,900,000. Actual costs of servicing products under warranty totaled $19,400.

Required:

1. Use the horizontal model (or a T-account of the Estimated Warranty Liability) to show the effect of having the warranty program during 2016.
2. What type of accrual adjustment should be made at the end of 2016?
3. Describe how the amount of the accrual adjustment could be determined.