Question

Streep Factory provides a 2-year warranty with one of its products which was first sold in 2014. In that year, Streep spent $70,000 servicing warranty claims. At year-end, Streep estimates that an additional $400,000 will be spent in the future to service warranty claims related to 2014 sales.

a. Prepare Streep's journal entry to record the $70,000 expenditure
b. Prepare the December 31 adjusting entry, assuming the expenditures are inventory costs.

Answer 1

The adjusting entry for Streep Factory's estimated future warranty claims of $400,000 related to 2014 sales is a debit to Warranty Expense and a credit to Warranty Liability for the same amount.

Step-by-step explanation:

When a company like Streep Factory sells a product with a warranty, it is essentially promising to incur future expenses related to servicing warranty claims. In 2014, Streep Factory spent $70,000 on servicing warranty claims. However, they estimate that an additional $400,000 will be spent in the future related to 2014 sales. The adjusting entry on December 31 would reflect this estimated liability.

Here's the adjusting entry for December 31:
Warranty Expense $400,000
Warranty Liability $400,000

This entry increases the warranty expense for the estimated future costs and records a corresponding liability because the company has an obligation to service future warranty claims.