DARIUS COMPANY

1. Prepare journal entries in connection with the warranty using the expense as incurred approach.

Particulars Debit Credit

Cash 5,000,000

Sales 5,000,000

(To record the sale in 2021)

Warranty Expense (14% × 5,000,000) 700,000

Estimated Warranty Liability 700,000

(To record the warranty expense in 2021)

Estimated Warranty Liability 200,000

Cash 200,000

(To record the actual warranty repairs)

Cash 9,000,000

Sales 9,000,000

(To record the sale in 2022)

Warranty Expense (14% × 9,000,000) 1,260,000

Estimated Warranty Liability 1,260,000

(To record the warranty expense in 2022)

Estimated Warranty Liability 560,000

Cash 560,000

(To record the actual warranty repairs)

2. Prepare journal entries in connection with the warranty using the accrual approach.

Particulars Debit Credit

Cash 5,000,000

Sales 5,000,000
 (To record the sale in 2021)

Warranty Expense (14% × 5,000,000) 700,000

Estimated Warranty Liability 700,000

(To record the warranty expense in 2021)

Estimated Warranty Liability 200,000

Cash 200,000

(To record the actual warranty repairs)

3. Determine the estimated warranty liability on December 31, 2021

Since as per question there is 10% provision to be maintain for Warranty on Sales.

Total Sales in 2021 is 9000000

Provision at 10% for Warranty = 10% of 9000000

= 900000

Less: Expense Incurred on Warranty = 560000

Estimated Warranty Liability in 2021 = 340000

4. Analyze the estimated warranty liability account to ascertain if adjustment is necessary. The sales and
warranty repairs are made evenly during the year.

Breakdown of sales made evenly in 2021

January 1, 2021 (5,000,000 × ½) = 2,500,000

July 1, 2021 (5,000,000 × ½) = 2,500,000

Total sales in 2021 = 5,000,000

Breakdown of sales made evenly in 2022

January 1, 2022 (9,000,000 x ½) = 4,500,000

July 1, 2022 (9,000,000 x ½) = 4,500,000

Total sales in 2022 9,000,000

Warranty expense related to 2021 sale

2021

First contract year of January 1, 2021 sales (2,500,000x4%) 100,000

First contract year of July 1, 2021 sales (2,500,000x4%x6/12) 50,000

2022

First contract year of July 1, 2021 sales (2,500,000x4%x6/12) 50,000

Second contract year of January 1, 2021 sales (2,500,000x10%) 250,000

Second contract year of July 1, 2021 sales (2,500,000x10%x6/12) 125,000

2023

Second contract year of July 1, 2021 sales (2,500,000x10%x6/12) 125,000

Total warranty expense for 2021 700,000

Warranty expense related to 2022 sales

2022

First contract year of January 1, 2022 sales (4,500,000x4%) 180,000

First contract year of July 1, 2022 sales (4,500,000x4%x6/12) 90,000

2023

First contract year of July 1, 2022 sales (4,500,000x4%x6/12) 90,000

Second contract year of January 1, 2022 sales (4,500,000x10%) 450,000

Secondcontract year of July 1, 2022 sales (4,500,000x10%x6/12) 225,000

2024

Secondcontract year of July 1, 2022 sales (4,500,000x10%x6/12) 225,000

Total warranty expense for 2022 1,260,000

5. Prepare the adjustment to correct the estimated warranty liability on December 31, 2021.

2021 sales still under warranty after December 31, 2022

 Second contract year of July 1, 2021 sales 125,000

2022 sales still under warranty after December 31, 2022

First contract year of July 1, 2022 sales 90,000

Second contract year of January 1, 2022 sales 450,000

Second contract year of July 1, 2022(225,000+225,000) 450,000

Estimated warranty liability - December 31, 2022 1,115,000

Estimated warranty liability - per book 1,200,000

Decrease in warranty liability (85,000)

Estimated warranty liability 85,000

Warranty expense 85,000

To record the adjustment of warranty expense of 2022

Socorro Company

1. Prepare journal entries in connection with the warranty using the “expense as incurred approach.
 Year Accounts Title Debit Credit

2020

31-Dec Warranty Expense 40,000

Cash 40,000

2021

31-Dec Warranty Expense 150,000

Cash 150,000

2. Prepare journal entries in connection with the warranty using the “accrual approach”.

Computation of Estimated Liability-2020

Particulars Amount

Warranty Liability required for Number of Sets sold-2020 180

Average repair Cost per set 800

Estimated Liability and Warranty expense-2020 144,000

Less: Warranty Payment (40,000)

Ending Provision as on Dec 31,2020 104,000

Computation of Estimated Liability-2021

Opening Estimated Warranty Liability as on Jan 1,2021 (A) 104,000

Warranty required for sets sold during the year 2021 (B) - 500 x 60% 300

Average repair Cost per set(C) 800

Estimated Liability for sets sold during 2021 ( B x C ) 240,000

Estimated Liability for sets sold during 2020 (300 x 40% x P800) 96,000

Total Estimated Liability 336,000

Less: Beginning Estimated Warranty Liability (104,000)

Warranty expense to be recognized 232,000

Journal Entries

Year Accounts Title Debit Credit

2020

31-Dec Warranty Expense 144,000

Estimated Liability for Warranties 144,000

Estimated Liability for Warranties 40,000

Cash 40,000

2021

31-Dec Warranty Expense 232,000

Estimated Liability for Warranties 232,000

Estimated Liability for Warranties 150,000

Cash 150,000

3. Determine the estimated warranty liability on December 31, 2021.

Estimated Warranty Liability as on December 31, 2021 336,000

Less: Warranty Payment (150,000)

Ending Estimated Warranty Liability as on Dec 31,2021 186,000

4. Analyze the estimated warranty liability account to ascertain whether actual warranty costs
approximate the estimate. The sales and warranty repairs are made evenly during the year.

Warranty expense related to 2021 sales

2021
First contract year of January 1, 2021 sales (2,250,000x20%) 450,000

First contract year of July 1, 2021 sales (2,250,000x20%x6/12) 225,000

2022

First contract year of July 1, 2021 sales (2,250,000x20%x6/12) 225,000

Second contract year of January 1, 2021 sales (2,250,000x40%) 900,000

Second contract year of July 1, 2021 sales (2,250,000x40%x6/12) 450,000

2023

Second contract year of July 1, 2021 sales (2,250,000x40%x6/12) 450,000

Total warranty expense for 2021 2,700,000

Warranty expense related to 2022 sales

2022

First contract year of January 1, 2022 sales (3,750,000x20%) 750,000

First contract year of July 1, 2022 sales (3,750,000x20%x6/12) 375,000

2023

First contract year of July 1, 2022 sales (3,750,000x20%x6/12) 375,000

Second contract year of January 1, 2022 sales (3,750,000x40%) 1,500,000

Second contract year of July 1, 2022 sales (3,750,000x40%x6/12) 750,000

2024

Secondcontract year of July 1, 2022 sales (3,750,000x40%x6/12) 750,000

Total warranty expense for 2022 4,500,000

5. 2021 sales still under warranty after December 31, 2022

Second contract year of July 1, 2021 sales 450,000

2022 sales still under warranty after December 31, 2022

First contract year of July 1, 2022 sales 375,000

Second contract year of January 1, 2022 sales 1,500,000

Second contract year of July 1, 2022(750,000+750,000) 1,500,000

Estimated warranty liability - December 31, 2022 3,825,000

Estimated warranty liability - per book 7,010,000

Decrease in warranty liability ( 3,185,000)

Estimated warranty liability 3,185,000

Warranty expense 3,185,000