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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 0.2% of sales. During 2016, sales totaled $4,208,000. Actual costs of servicing products under warranty totaled $19,900.

Required:
Record the journal entry to show the effect of having the warranty program during 2019. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Respuesta :

Answer:

Event 1:

Debit Warranty expense for $8.416.

Credit Warranty liability $8,416.

Event 2:

Debit Warranty liability for $8,416.

Debit Warranty expenses for $11,484.

Credit Cash for $19,900.

Explanation:

Estimated warranty liability = $4,208,000 * 0.2% = $8,416.

Excess of actual and over extimated warranty liability = $19,900 - $8,416 = $11,484

The journal entries will look as follows:

Details                                         Dr ($)                  Cr ($)

Warranty expense                      8.416

Warranty liability                                                   8,416

(To record the estimated warranty liability).                      

Warranty liability                         8,416

Warranty expenses                   11,484

Cash                                                                   19,900

(To record actual warranty cost).                                        

The journal entries for representing the effect to having the warranty program is shown below.

Journal entries:

Warranty expense(4208000*0.2%) 8416

           Extended Warranty Liabilities  8416

(Being warranty expense is recorded)

Here warranty expense is debited as it increased the expense and credited the warranty liabilities because it also increased the liabilities

Extended Warranty Liabilities 8416

Warranty expense (19900-8416) 11484

      Cash  19900

(Being cash paid is recorded)

Here liabilities and expense is debited because it decreased the liabilities and increase the expenses while on the other hand, the cash is credited as it decreased the assets.

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