Question
Key Services introduced a new line of lawn products in 2016 that carry a one-year warranty against manufacturer's defects. Because this was the first product
Key Services introduced a new line of lawn products in 2016 that carry a one-year warranty against manufacturer's defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 3% of sales. Sales of the sprinklers in 2016 were $500,000. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:
Accrued liability and expense
Warranty expense (3% x $500,000) 15,000 Estimated warranty liability 15,000
Actual expenditures (summary entry)
Estimated warranty liability .. 4,600 Cash, wages payable, parts and supplies, etc. 4,600
In late 2017, the companys claims experience was evaluated and it was determined that claims were far more than expected 4% of sales rather than 3%.
Required:
1. Assuming sales of the sprinklers in 2017 were $720,000 and warranty expenditures in 2017 totaled $17,600, prepare any journal entries related to the warranty.
2. Assuming sales of the sprinklers were discontinued after 2016, prepare any journal entry(s) in 2017 related to the warranty.
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