Cloudy introduces a new compact music player that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 1% of sales. By the end of the first year of selling the product, total sales are $29.6 million, and actual warranty expenditures are $160,000. Record the adjusting entry for the remaining expected future warranty costs as of December 31, the end of the reporting period. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Enter your answers in dollars, not millions. For example, $5.5 million should be entered as 5,500,000.)
Question
Cloudy introduces a new compact music player that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 1% of sales. By the end of the first year of selling the product, total sales are 160,000. Record the adjusting entry for the remaining expected future warranty costs as of December 31, the end of the reporting period. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Enter your answers in dollars, not millions. For example, $5.5 million should be entered as 5,500,000.)
Solution
First, we need to calculate the expected warranty costs based on the total sales.
The expected warranty costs are 1% of total sales, which is $29.6 million.
So, the expected warranty costs = 1/100 * 296,000
By the end of the first year, the actual warranty expenditures are $160,000.
Therefore, the remaining expected future warranty costs = Expected warranty costs - Actual warranty expenditures = 160,000 = $136,000
The adjusting entry for the remaining expected future warranty costs as of December 31 would be:
Debit: Warranty Expense 136,000
This entry recognizes the expected future warranty costs that the company will likely incur based on the sales of the music player. The Warranty Expense is debited to record the expense, and the Warranty Liability is credited to show the company's liability or obligation to honor the warranties in the future.
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