Question

Lily Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Lily 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 2020 are as follows:

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

Required:
a. Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 1,237 warranty claims.
b. Determine the estimated warranty liability at December 31 for the units sold in November and December.

Answer 1

Answer and Explanation:

The computation is shown below:

In November month:

Estimated defective units:

= Estimated Percentage to be defective units × Units sold

= 4% × 37,300

= 1,492

The Estimated cost of repairing defective units is

= Estimated defective units × Estimated cost of repairing the defective unit

= 1,492 × $20

= $29,840

In December month:

Estimated defective units:

= Estimated Percentage to be defective units × Units sold

= 4% × 39,300

= 1,572

The Estimated cost of repairing defective units:

= Estimated defective units × Estimated cost of repairing the defective unit

= 1,572 × $20

= $31,440

Now the Total estimated liability is

= $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

(Being warranty expense is recorded)

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

To Cash/ Material consume $24,740

(being cash paid is recorded)

(b) The estimated warranty liability is $61,280