Question

Streep Factory provides a 2-year warranty with one of its products which was first sold in 2020. Streep sold $1,000,000 of products subject to the warranty. Streep expects $125,000 of warranty costs over the next 2 years. In that year, Streep spent $70,000 servicing warranty claims. Prepare Streep’s journal entry to record the sales (ignore cost of goods sold) and the December 31 adjusting entry, assum- ing the expenditures are inventory costs.

Answer 1

Answer:

The Journal entries are as follows:

(i) During 2020,

Cash/ Accounts receivable A/c   Dr. $1,000,000

To sales revenue A/c                                             $1,000,000

(To record the product sold)

(ii) Warranty expenses A/c    Dr. $70,000

To Inventory A/c                                         $70,000

(To record the Warranty expenses)

(iii) Adjusting entry,

Warranty expenses A/c    Dr. $55,000

To Liabilities under warranty A/c           $55,000

(To record the December 31 adjusting entry)

Liabilities under warranty = Warranty costs - servicing warranty claims

                                          = $125,000 - $70,000

                                          = $55,000