Current Liabilities – Accounting for Warranties (14 points) Palmer Manufacturing

Question

Current Liabilities – Accounting for Warranties (14 points)

Palmer Manufacturing began operations in January 2018. Palmer sells widgets that carry a two-year manufacturer's warranty against defects in workmanship. Palmer's management projects that 8% of the widgets will require repair during the two-year period. The widgets sell for $500 each. The average cash cost to repair a widget is $40. Sales and warranty information for 2018 is as follows:

2018: Sold 15,000 widgets on account; incurred warranty expenditures of $25,000.

Required:
1. Prepare the necessary journal entry in 2018 to record the warranty expense.

2. Prepare the necessary journal entry in 2018 to record the warranty expenditures ($25,000).
3. What is the balance in the warranties payable account on the December 31, 2018 balance sheet?

Account Debit   Credit Account Debit   Credit Account Debit   Credit

Explanation / Answer

Journal Entries Date Account Title and explanation Debit Credit Answer =1) Warranty Expenses $                  48,000    To Estimated Warranty Liabilites $                     48,000 (To Record the warranty Expenses of the year) Answer =2) Estimated Warranty Liabilites $                  25,000          To Parts Inventory $                     25,000 (To Record the consumption of warranty) Estimated Warranty Liabilites = $                  48,000 Answer =3) Less: Expenses incurred in the current year $                  25,000 Warranty Payable for the year ended December 31, 2018 = $                  23,000

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