Jammerz Corp. sells mp3 players. Jammerz provides all customers a two-year warra
ID: 2356894 • Letter: J
Question
Jammerz Corp. sells mp3 players. Jammerz provides all customers a two-year warranty. The warranty guarantees free repair of any defects reported during the warranty period. During 2008, Jammerz sold 100,000 mp3 players for $325 each. From analysis of past warranty records, management estimates 12% of units sold will be returned for repair during the warranty period. Jammerz expects the cost to repair a unit to be $14. The estimated liability for Warranties account balance as of January 1, 2008 was $120,000. During 2008, Jammerz incurred warranty repair costs of $150,000. a. Prepare all journal entries to record the events related to 2008 warranty transactions. b. Compute the calendar year-end Estimated Liability for Warranties account balance.Explanation / Answer
a) First we record the actual sale of the mp3 players. How is this related to warranties, well the warranty can not be put in place without a sale first taking place. Thus, the first entry is a simple debit to cash for 32,500,000 and credit to Sales revenue for 32,500,000. To record the initial estimated liability, we record the percent the company expects to be returned for replacement times the cost of the asset returned. The title for this account dated January 1, 2008 is a debit to Product Warranty Expense and a credit for Estimated product warranty liability the amount to debit or credit these accounts is given to you in the problem as $120,000. The other entry in the journal is for the actual incurred warranty repair costs of $150,000. The entry to recognize these repair costs would be "warranty liability" debit for 150,000 to remove the liability since the costs have actually occurred now, and credit to "inventory (warranty costs incurred)" for 150,000. To answer b. we estimated that 12% of units sold or 12,000 units would be returned for repair during warranty at an estimated cost of $14. This gives us our estimated warranty of 168,000. The beginning estimated liability was 120,000 and the actual repair costs were 150,000. So we use the equation ending warranty liability=beginning warranty liability + estimated warranty - actual warranty costs. Thus our year end estimated warranty liability=120000+168000-150000=$138,000.
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