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Ventana Company, a manufacturer of heavy machinery, grants a four- year warranty on its products. The Estimated Liability for Product Warranty account shows the
Ventana Company, a manufacturer of heavy machinery, grants a four- year warranty on its products. The Estimated Liability for Product Warranty account shows the following transactions for the year: Opening balance $ 45,000 20,000 Provision (made at interim dates) 65,000 Cost of servicing claims (12,000) Ending balance (before adjustment) $ 53,000 A review of unsettled claims and the company's experience indicates that claims have averaged 2% of net sales per year. The following additional information is available from the company's records at the end of the current year: Gross sales Sales returns and allowances Cost of goods sold $2,040,000 40,000 1,350,000 Instructions [a] Prepare any necessary adjusting journal entries, giving effect to the proper accounting treatment of product warranties. Support any entries with clearly detailed computations. The books have not been closed. [b] Identify the amount of the expense included in the determination of net income and the amount of the liability presented in the balance sheet for warranties.
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