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General Accounting Discussions: Warranty Liability Adjustment

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  1.  
    • CommentAuthordoctorIV
    • CommentTimeJul 9th 2009
     
    Hello Everyone!
    I have a question regarding warranty liability adjustment. Assume that a product with a 1-year warranty was sold in 2008 and estimated warranty liability for 2008 was $41,000. Actual costs to repair the product were only $40,000, i.e., estimated liability was debited for $40,000 and cash/inventory/paroll credited for $40,000 How should we treat a $1,000 balance? What entries should be made to adjust the balance in 2009 when actual costs are less than expected? Also, if we assume that repair costs turned out to be higher than estimated liability under warranty, what entries should be made then?

    Can someone help?

    Thank you,
    Ita
  2.  
    In this case where there is a credit balance of $1,000 it will be used to offset the warranty liability for the next year. Assuming that the liability for the next year is estimated at $45,000, you need to provide for only $44,000. If there is debit balance instead, the charge to the next year's expense will be $1,000 more.

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