Accounting


Accounting Forum

AccountingCoach.com is the world's largest free online accounting course.


Not signed in (Sign In)

Categories

Vanilla 1.1.7 is a product of Lussumo. More Information: Documentation, Community Support.

Welcome Guest!
Want to take part in these discussions? If you have an account, sign in now.
If you don't have an account, apply for one now.

General Accounting Discussions: Warenty Liability Problem!

Bottom of Page

1 to 3 of 3

  1.  
    • CommentAuthorpig1
    • CommentTimeApr 1st 2009 edited
     
    I have been trying for so long and cannot figure this problem out, can someone help me!

    The Athletic Accountant Company produces exercise equipment for accountants. Its main product, the Pencil-Pusher Push-Up Platform, is sold with a three-year warranty against defects. The company expects that 1% of the units sold will prove to be defective in the first year after they were sold, 2% will be prove defective in the second year, and 3% of the units sold will prove to be defective in the third year. The average cost to repair or replace a defective unit under the warranty is expected to be $50

    Units sold Actual costs of
    repairs and replacements
    under the warranty plan
    2006 9,000 units $ 5,000 cost
    2007 12,000 units $ 16,000 cost
    2008 17,000 units $ 37,000 cost

    1.Calculate the amount that should have appeared in the warranty obligation (liability) account at the end of 2006
    2.Calculate the amount of warranty expense that should have ben recognized in 2007

    I keep coming up with $500 for #1 but it's not right and i don't know how.
    • CommentAuthormfargen
    • CommentTimeApr 3rd 2009 edited
     
    Since it is a 3 year warranty, include all 3 years in the estimated warranty liability at the time of sales to match the warranty expense with the sales revenue. The total warranty liability would be:
    2006
    9000 x 6% = 540 units to be returned for warranty service
    Cost 540 x $50 = $27000


    dr warranty expense 27000
    cr estimated warranty liability 27000

    During the year you have journal entries for actual warranty service as follows:
    dr estimated warranty liability 5000
    cr auto parts inventory 5000

    Therefore at the end of 2006 you should have a balance in estimated warranty liability of 27000-5000 = 22000.

    MJF / accounting student
    • CommentAuthormtlcc
    • CommentTimeNov 4th 2009
     
    how about the 2nd part?

1 to 3 of 3

  1.  



 

Why AccountingCoach.com?

the accounting coach

AccountingCoach.com is designed to help people without an accounting background easily understand accounting concepts at no cost.


By investing thousands of hours, we have created clear and concise accounting information for both business people and students of all ages.


We understand how difficult accounting can be. That's why we have ensured that each accounting topic includes a clear explanation, reinforcing drills, Q&A, puzzles, dictionary of terms, etc.


Read 1,200+ Visitor Testimonials



What's on AccountingCoach.com?