Q3TI - Horngren'S Financial And Managerial Accounting

Question

O’Conner guarantees its vacuums for four years. Prior experience indicates that warranty costs will be approximately 6%ofsales. Assume that O’Conner made sales totaling $200,000 during 2018. Record the warranty expense for the year.

Step-by-Step Solution

Answer

Answer :

Date	Account	Debit	Credit
2018	Warranty Expense	$12,000
	Warranty Payable		$12,000
	To record the warranty expense for 2018

 

Step-by-step solution

Step 1: Calculation for warranty costs

$$\begin{gathered} \mathrm{Warranty} \mathrm{Cost} = \mathrm{Percentage} \mathrm{of} \mathrm{sales} \times \mathrm{Sales} \\ = 6\% \times \$200,000 \\ =\$12,000 \end{gathered}$$

Step 2: Explanation about warranty costs.

The warranty costs are matched to the sales to apply the matching concept requiring expenses are matched to their associated revenues. The expense is recognized by creating a warranty account that is drawn upon when repairs are performed.

Step 3: Explanation of the journal entry

Warranty expense is debited and warranty payable is credited by an amount of $12,000 in order to record the warranty expense for 2018.