Betancourt Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Betancourt estimates that 4% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing or repairing a defective unit is $20. The units sold and units defective that occurred during the last 2 months of 2017 are as follows.

Months Units Sold Units Defective Prior to December 31
November 37,300 746
December 39,300 491

Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 1,237 warranty claims. (Assume actual costs of $24,740.)

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Dryomys Dryomys · Answer 1 · 2019-12-16T06:15:07+01:00

Answer:

In November:

Estimated defective units:

= Percentage Estimated to be defective units × Units sold

= 4% × 37,300

= 1,492

Estimated cost of repairing defective units:

= Estimated defective units × Estimated cost of repairing defective unit

= 1,492 × $20

= $29,840

In December:

Estimated defective units:

= Percentage Estimated to be defective units × Units sold

= 4% × 39,300

= 1,572

Estimated cost of repairing defective units:

= Estimated defective units × Estimated cost of repairing defective unit

= 1,572 × $20

= $31,440

Total estimated liability:

= $29,840 + $31,440

= $61,280

The Journal entries are as follows:

(a) Warranty expenses A/c Dr. $61,280

To Estimated warranty payable $61,280

(Estimated warranty expenses for December and November sales)

(b) Estimated warranty payable A/c Dr. $24,740

To Cash/ Material consume $24,740

(To record warranty expenses incurred)