Lovely A.

Cabug-os BSA-2A

Assignment #6

I. Explain The Following

1 Explain warranty.
Warranty is given to provide free repair service or replacement
during a specified period if the products are defective.
2 What are the conditions for the recognition of a warranty
provision?
a. The entity has a present obligation, legal or constructive, as a
result of a past event.
b. It is probable that an outflow of resources embodying economic
benefits would be required to settle the obligation,
c. The amount of the obligation can be measured reliably.
3 Explain the accrual approach of accounting for warranty cost.
The accrual approach has the soundest theoretical support because
it properly matches the cost with revenue.
4 Explain the expense as incurred approach of accounting for warranty cost.
The expense as incurred approach is the approach of expensing
warranty cost only when actually incurred.
5 Explain the the sale of an extended warranty.
An Extended warranty a service contract or a maintenance agreement is a
prolonged warranty offered to consumers in addition to the standard
warranty on new items.
II. Solving Problem
In 2020, Dare Company began selling a new calculator that carried a two- year warranty
against defects.

The entity projected the estimated warranty cost as a percent of sales.

First year of warranty

Second year of warranty

Sales and actual warranty repairs were

Sales
Actual warranty repairs

Requirements
1 Prepare journal entries in connection with the warranty using
 the expense as incurred approach
Journal Entries
2020
Estimated warranty liability
Cash
2021
Estimated warranty liability
Cash
2 Prepare journal entries in connection with the warranty using
the accrual approach.

2020
Warranty expense
Estimated warranty liability
(14% x 5,000,000)
Journal Entries 2021
Warranty expense
Estimated warranty liability
(14% x 9,000,000)
3 Determine the estimated warranty liability on December 31, 2021.
Warranty expense
2020
2021
Actual warranty repairs
2020
2021
Estimated warranty liability - December 31, 2021
4 Analyze the estimated warranty liability account to ascertain if
adjustment is necessary. The sales and warranty repairs
are made evenly during the year.
Estimated warranty liability - December 31, 2021
Estimated warranty liability per book
Decrease in warranty liability
5 Prepare the adjustment to correct the estimated warranty liability
on December 31, 2021.
Warranty expense related to 2020 sales
2020
First contract year of January 1,2020 sales

First contract year of January 1,2020 sales

 2021
First contract year of July 1,2020 sales

Second contract year of January 1,2020 sales

Second contract year of July 1,2020 sales

2022
Second contract year of July 1,2020 sales

Total warranty expense for 2020

Warranty expense related to 2021 sales
2021
First contract year of January 1,2020 sales

First contract year of July 1,2020 sales

2022
First contract year of July 1,2020 sales

Second contract year of January 1,2020 sales

Second contract year of July 1,2020 sales

2023
Second contract year of July 1,2020 sales

Total warranty expense for 2021

2020 sales still under warranty after December 31,2021
Second contract year of July 1,2020 sales
2021 sales still under warranty after December 31,2021
First contract year of July 1,2020 sales
Second contract year of January 1,2020 sales
Second contract year of July 1,2020 sales

Estimated warranty liability - December 31, 2021

Estimated warranty liability per book
Decrease in warranty liability
The decrease in warranty liability is an adjustment of the warranty expense of 2021
Esrimated warranty
Warranty Expense
As of December 31, 2021 the estimated warranty liability will be as follows:
Warranty expense
2020
2021
Actual warranty repairs
2020
2021
Estimated warranty liability- December 31,2021
air service or replacement
ucts are defective.
f a warranty

legal or constructive, as a

sources embodying economic

he obligation,
e measured reliably.
or warranty cost.
st theoretical support because

accounting for warranty cost.

he approach of expensing

ract or a maintenance agreement is a

mers in addition to the standard

culator that carried a two- year warranty

t as a percent of sales.

4%
10%

2020 2021

5,000,000 9,000,000
200,000 560,000

e warranty using
 200,000.00
200,000.00

560,000.00
560,000.00
e warranty using

700,000.00
700,000.00

1,260,000.00
1,260,000.00

n December 31, 2021.

700,000.00
1,260,000.00 1,960,000.00

200,000.00
560,000.00 760,000.00
1,200,000.00
ount to ascertain if
nty repairs

1,200,000.00
1,115,000.00
85,000.00
ted warranty liability

100,000.00
(2,500,000 x 4%)
50,000.00
(2,500,000 x 4% x 6/12)
 50,000.00
(2,500,000 x 4% x 6/12)
250,000.00
(2,500,000 x 10%)
125,000.00
(2,500,000 x 10% x 6/12)

125,000.00
(2,500,000 x 10% x 6/12)
700,000.00

180,000.00
(4,500,000 x 4%)
90,000.00
(4,500,000 x 4% x 6/12)

90,000.00
(4,500,000 x 4% x 6/12)
450,000.00
(4,500,000 x 10%)
225,000.00
(4,500,000 x 10% x 6/12)

225,000.00
(4,500,000 x 10% x 6/12)
1,260,000.00
r December 31,2021
125,000.00
r December 31,2021
90,000.00
450,000.00
450,000.00
(225,000 + 225,000)
ber 31, 2021 1,115,000.00
1,200,000.00
(85,000.00)
djustment of the warranty expense of 2021
85,000.00
85,000.00
warranty liability will be as follows:

700,000.00
1,260,000.00 1,960,000.00

200,000.00
560,000.00 760,000.00
1,200,000.00 Per book