Audio Works Inc. warrants its products for one year. The estimated product warra

Question

Audio Works Inc. warrants its products for one year. The estimated product warranty is 2% of sales. Assume that sales were $500,000 for January. In February, a customer received warranty repairs requiring $2,500 of parts.

Determine the warranty liability at January 31st, the end of the first month of the current year. (please show your work)

What accounts are decreased for the warranty work provided in February? (please explain)

Showing the work and explanations I am hoping will help me understand. I tried off a tutorial, but it lacked in explanation for me to grab onto the concept.

Explanation / Answer

Calculating the warranty liability for the Jan 31st: 2% of sales = 2% ($500,000)                    = $10000    Particulars                     Dr.                      Cr. Warranty expense             $10,000          Provision for warranty                      $10,000 Therefore, the warranty liability for Jan 31st is $10,000 Particulars                        Dr.                     Cr. Provision for warranty    $2500          Cash                                                $2500 So cash and provision accounts are decreased in February.

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