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Calculate the balance of the provision for warranty

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Reference no: EM132618953

Question - Consumer Corp. sells dishwashers and washing machines that come with a two-year unlimited warranty on parts and labour for repairs. The warranty is intended to assure customers that the appliances will operate as advertised. The warranty is expected to cost 2% of sales in the first year and 4% of sales in the second year, for a total of 6%. The provision for warranty has a credit balance of $145,000 at the beginning of 2019. The following events and decisions relate to the warranty:

2019

Sales revenue of $4,600,000 was generated from products covered by the warranty. Both the sale and the warranty provision must be recorded.

2019

Warranty work consumed parts inventory with a cost of $9,000, and labour of $22,000.

2020

Sales revenue from products covered by the warranty were $6,100,000. Both the sale and the warranty provision must be recorded.

2020

Sales revenue of $6,100,000 was generated from products covered by the warranty.

Warranty work consumed parts inventory with a cost of $126,000, and labour of $289,000

2020

Year-end review indicated that the percentage used as an estimate for warranty work in 20X5 and 20X6 should have been a total of 8% of sales, rather than 6%.

2020

Because of a specific prevalent defect to a seal discovered during repairs in 2020, the company announced that it would cover repairs for this specific defect for a third year for all sales of product made in 2019 and 2020. The cost of this work was estimated to be 1% of sales. This is in excess of the percentage increase described above. Products were re-engineered to eliminate the defect starting in 2021.

Required -

1. Prepare journal entries for the events listed above. Because of uncertainty of estimates, no discounting is to be applied.

2. Calculate the balance of the provision for warranty at 31 December 2019 and 2020.

Reference no: EM132618953

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