Clean-All Inc. sells, on account, washing machines with a 3-year assurance-type warranty. In the...

Question:

Clean-All Inc. sells, on account, washing machines with a 3-year assurance-type warranty. In the past, Clean-All has found that in the year after the sale, warranty costs have been 3% of sales; in the second year after the sale, 5% of sales; and in the third year after the sale, 7% of sales. The following data are also available:

Year Sales Warranty Expenditures
2016 $500,000 $62,000
2017 650,000 82,000
2018 700,000 85,000

Prepare the journal entries for the preceding transactions for 2016-2018.

Recording Warranty Expense

In accrual accounting, the cost of product warranties should be recorded in the same accounting period the sales revenue is recorded. This is done by estimating the warranty cost for a period, usually as a percentage of sales revenue.

Answer and Explanation: 1

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The total expected warranty cost is 3% + 5% + 7% = 15% of sales. The journal entries are:

Date Description Debit Credit
2016 DR Accounts...

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Recording Warranty and Service Costs

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Chapter 7 / Lesson 5
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Explore ways businesses record, calculate, and account for warranty and service costs. Examine what warranty and service costs are, discover methods of finding expense percentages and how to assign the costs to an account, and view an example.


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