Prist Co. had not provided a warranty on its products, but competitive pressures

Question

Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2010. Based on an analysis of customer complaints made over the past two year, the cost of a warranty program was estimated at 0.2% of sales. During 2010, sales totaled $4,600,000. Actual costs of servicing products under warranty totaled $12,700.

a.     Use the horizontal model (or a T-account of the Estimated Warranty Liability) to show the effect of having the warranty program during 2010.

b.     What type of accrual adjustment should b e made at the end of 2010?

c.      Describe how the amount of the accrual adjustment could be determined.

Explanation / Answer

Based on Sales at $4,600,000, estimated cost = 0.2% * 4,600,000 = $9,200

However the actual Warranty totaled = $12,700

Estimated Warrenty Liability

Debit Credit

$12,700 | $9,200

WIth a debit balance on Estimated Warrenty Liability account, adjustment should be made include,

Debit to Warranty Expenses

Credit to Estimated Warrenty Liability

c) The amount of the adjustment = $12,700 - $9,200 = $ 3,500

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