Question

Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2019. 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 2019, sales totaled $4,486,000. Actual costs of servicing products under warranty totaled $20,100. a-2. Record the journal entry to show the effect of having the warranty program during 2019

Answer 1

Prist Co.

Journal Entry, showing the effect of having the warranty program during 2019:

Debit Warranty Expense $13,458

Credit Warranty Liability $13,458

To establish the warranty liability of 0.3% of sales.

Debit Warranty Liability $20,100

Credit Inventory $20,100

To record the actual cost of warranty.

Debit Warranty Expense $6,642

Credit Warranty Liability $6,642

To account for the difference between the actual cost and the estimated cost.

Step-by-step explanation:

a) Data and Calculations:

Estimated cost of a warranty program = 0.3% of sales

2019 Sales = $4,486,000

Estimated Warranty liability for 2019 = $13,458 ($4,486,000 * 0.3%)

Actual warranty expense = $20,100

Difference between warranty liability and actual warranty expense $6,642 ($20,100 - $13,458)