PROBLEM 3-2

In 2022, 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 4%
Second year of warranty 10%

Sales and actual warranty repairs were:

2022 2023
Sales ₱ 5,000,000 ₱ 9,000,000
Actual warranty repairs 200,000 560,000
REQUIRED:
1. P r e p a r e j o u r n a l e n t r i e s i n c o n n e c t i o n w i t h t h e w a r r a n t y u s i n g
t h e e x p e n s e a s i n c u r re d a p p r o a c h .

2. P r e p a r e j o u r n a l e n t r i e s i n c o n n e c t i o n w i t h t h e w a r r a n t y u s i n g
t h e a c c r u a l a p p ro a c h .

3. D e t e r m i n e t h e e s t i m a t e d w a r r a n t y l i a b i l i t y o n D e c e m b e r 3 1 .
2023 as recorded.

4. A n a l y z e t h e e s t i m a t e d w a r r a n t y l i a b i l i t y o n D e c e m b e r 3 1 , 2 0 2 3
t o a s c e r t a i n i f a d j u s t m e n t i s n e c e s s a r y. T h e s a l e s a n d w a r r a n t y
r e p a i r s a r e m a d e e v e n l y d u r i n g t h e y e a r.

5. P r e p a r e t h e a d j u s t m e n t t o c o r r e c t t h e e s t i m a t e d w a r r a n t y
liability on December 31, 2023.
REQUIREMENT Prepare journal entries in connection with the
warranty using the expense as incurred approach.
1:
E x p e n s e A p p ro a c h
To record the sale:
2022 Cash ₱ 5,000,000
Sales ₱ 5,000,000
To record the warranty expense:
Warranty Expense 200,000
Cash 200,000
To record the sale:
2023 Cash 9,000,000
Sales 9,000,000
To record the warranty expense:
Warranty Expense 560,000
Cash 560,000
REQUIREMENT Prepare journal entries in connection with the
warranty using the accrual approach.
2:
A c c r u a l A p p ro a c h

To record the sale:

2022 Cash ₱ 5,000,000
Sales ₱ 5,000,000
To record the warranty expense:
Warranty Expense 700,000
Estimated Warranty Liability 700,000
To record the actual warranty repairs:
Estimated Warranty Liability 200,000
Cash 200,000
REQUIREMENT Prepare journal entries in connection with the
warranty using the accrual approach.
2:
A c c r u a l A p p ro a c h

To record the sale:

2023 Cash ₱ 9,000,000
Sales ₱ 9,000,000
To record the warranty expense:
Warranty Expense 1,260,000
Estimated Warranty
Liability 1,260,000
To record the actual warranty repairs:
Estimated Warranty Liability 560,000
Cash 560,000
REQUIREMENT
3: Determine the estimated warranty liability on December 31. 2023 as
recorded.

Warranty expense:
2022 ₱ 700,000
2023 1,260,000 ₱ 1,960,000
Actual warranty repairs:
2022 200,000
2023 560,000 -760000
₱ 1,200,000
REQUIREMENT
4: Analyze the estimated warranty liability on December 31, 2023 to
a s c e r t a i n i f a d j u s t m e n t i s n e c e s s a r y. T h e s a l e s a n d w a r r a n t y r e p a i r s a r e
m a d e e v e n l y d u r i n g t h e y e a r.

Warranty Expenses related to 2022 sales

2022 First contact year of 1/1/2022 sales (2,500,000x4%) ₱ 100,000
First contact year of 7/1/2022 sales (2,500,000x4%x6/12) 50,000
2023 First contact year of 7/1/2022 sales (2,500,000x4%x6/12) 50,000
Second contact year of 1/1/2022 sales (2,500,000x10%) 250,000
Second contact year of 7/1/2022 sales (2,500,000x10%x6/12) 125,000
2024 Second contact year of 7/1/2022 sales (2,500,000x10%x6/12) 125,000
Warranty Expenses for 2022 ₱ 700,000
REQUIREMENT
4: Analyze the estimated warranty liability on December 31, 2023 to
a s c e r t a i n i f a d j u s t m e n t i s n e c e s s a r y. T h e s a l e s a n d w a r r a n t y r e p a i r s a r e
m a d e e v e n l y d u r i n g t h e y e a r.

Warranty Expenses related to 2023 sales

2023 First contact year of 1/1/2023 sales (4,500,000x4%) ₱ 180,000
First contact year of 7/1/2023 sales (4,500,000x4%x6/12) 90,000
2024 First contact year of 7/1/2023 sales (4,500,000x4%x6/12) 90,000
Second contact year of 1/1/2023 sales (4,500,000x10%) 450,000
Second contact year of 7/1/2023 sales (4,500,000x10%x6/12) 225,000
2025 Second contact year of 7/1/2023 sales (4,500,000x10%x6/12) 225,000
Warranty Expenses for 2023 ₱ 1,260,000
REQUIREMENT
5:
Prepare the adjustment to correct the estimated warranty liability on
December 31, 2023.

2022 Sales still under warranty after 12/31/2023

Second contract year of 7/1/2023 sales ₱ 125,000
2023 Sales still under warranty after 12/31/2023
First contract year of 7/1/2023 sales 90,000
Second contract year of 1/1/2023 sales 450,000
Second contract year of 7/1/2023 sales 450,000
Estimated warranty liability 12/31/2023 ₱1,115,000
Estimated warranty liability per book -1,200,000
Decrease in warranty liability ₱ 85,000
REQUIREMENT
5:
Prepare the adjustment to correct the estimated warranty liability on
December 31, 2023.

Entry:
Estimated warranty liability ₱ 85,000
Warranty Expense ₱ 85,000