CHAPTER 3 - WARRANTY LIABILITY

Problem 3 - 1

Socorro Company sells color television sets with a two-year repair warranty. The sale price for
each set is P15,000. The average repair cost per set is P800.

Research has shown that 20% of all sets sold are repaired in the first year and 40% in the
second year.

2021 2022
Number of sets sold 300 500
Total payments for warranty repairs 40,000 150,000

Required:

1. Prepare journal entries in connection with the warranty using the expense as incurred
approach.
2. Prepare journal entries in connection with the warranty using the accrual approach.
3. Determine the estimated warranty liability on December 31, 2022.
4. Analyze the estimated warranty liability on December 31, 2022 to ascertain whether
actual warranty costs approximate the estimate. The sales and warranty repairs are
made evenly during the year.
5. Prepare journal entry to correct the estimated warranty liability on December 31, 2022.

Answer:

1.
Incurred approach
Cash 4,500,000

Sales (300 x 15,000) 4,500,000

To record the sale in 2021.

Warranty expense(60%x4,500,000) 2,700,000

Estimated warranty liability 2,700,000

To record the warranty expense in 2021.

Estimated warranty liability 40,000

 Cash 40,000

To record the actual warranty repairs.

Cash 7,500,000

Sales (500 x 15,000) 7,500,000

To record the sale in 2022.

Warranty expense(60%x7,500,000) 4,500,000

Estimated warranty liability 4,500,000

To record the warranty expense in 2022.

Estimated warranty liability 150,000

Cash 150,000

To record the actual warranty repairs.

2. Accrual approach

Cash 4,500,000

Sales (300 x 15,000) 4,500,000

To record the sale in 2021.

Warranty expense(60%x300x800) 144,000

Estimated warranty liability 144,000

To record the warranty expense in 2021.

Estimated warranty liability 40,000

Cash 40,000

To record the actual warranty repairs.

 Cash 7,500,000

Sales (500 x 15,000) 7,500,000

To record the sale in 2022.

Warranty expense(60%x500x800) 240,000

Estimated warranty liability 240,000

To record the warranty expense in 2022.

Estimated warranty liability 150,000

Cash 150,000

To record the actual warranty repairs.

3.
Warranty expense
2021 2,700,000
2022 4,500,000 7,200,000
Actual warranty expense
2021 40,000
2022 150,000 190,000
Estimated warranty liability - December 31, 2022 7,010,000

4.
Breakdown of sales made evenly in 2021
January 1, 2021(4,500,000 x ½) 2,250,000
July 1, 2021 (4,500,000 x ½) 2,250,000
Total sales in 2021 4,500,000

Breakdown of sales made evenly in 2022

January 1, 2022(7,500,000 x ½) 3,750,000
July 1, 2022 (7,500,000 x ½) 3,750,000
Total sales in 2022 7,500,000

Warranty expense related to 2021 sales

 2021
First contract year of January 1, 2021 sales (2,250,000x20%) 450,000

First contract year of July 1, 2021 sales (2,250,000x20%x6/12) 225,000

2022
First contract year of July 1, 2021 sales (2,250,000x20%x6/12) 225,000

Second contract year of January 1, 2021 sales (2,250,000x40%) 900,000

Second contract year of July 1, 2021 sales (2,250,000x40%x6/12) 450,000

2023 450,000
Second contract year of July 1, 2021 sales (2,250,000x40%x6/12)

Total warranty expense for 2021 2,700,000

Warranty expense related to 2022 sales

2022
First contract year of January 1, 2022 sales (3,750,000x20%) 750,000

First contract year of July 1, 2022 sales (3,750,000x20%x6/12) 375,000

2023
First contract year of July 1, 2022 sales (3,750,000x20%x6/12) 375,000

Second contract year of January 1, 2022 sales (3,750,000x40%) 1,500,000

Second contract year of July 1, 2022 sales (3,750,000x40%x6/12) 750,000

2024 750,000
Second contract year of July 1, 2022 sales (3,750,000x40%x6/12)

Total warranty expense for 2022 4,500,000

5. 2021 sales still under warranty after December 31, 2022

Second contract year of July 1, 2021 sales 450,000
2022 sales still under warranty after December 31, 2022
First contract year of July 1, 2022 sales 375,000
Second contract year of January 1, 2022 sales 1,500,000
Second contract year of July 1, 2022(750,000+750,000) 1,500,000
Estimated warranty liability - December 31, 2022 3,825,000
Estimated warranty liability - per book 7,010,000
Decrease in warranty liability ( 3,185,000)

Estimated warranty liability 3,185,000

Warranty expense 3,185,000
 To record the adjustment of warranty expense of 2022.

Problem 3-2

In 2021, Dare Company began selling a new calculator that carried a two-year warranty against
defects.

The entity projected the estimated warranty cost as a percent of sales.

First year of warranty 4%

Second year of warranty 10%

2021 2022
Sales 5,000,000 9,000,000
Actual warranty repairs 200,000 560,000

Required:
1. Prepare journal entries in connection with the warranty using the expense as incurred
approach.
2. Prepare journal entries in connection with the warranty using the accrual approach.
3. Determine the estimated warranty liability on December 31, 2022.
4. Analyze the estimated warranty liability on December 31, 2022 to ascertain if adjustment
is necessary. The sales and warranty repairs are made evenly during the year.
5. Prepare the adjustment to correct the estimated warranty liability on December 31, 2022.

Answer:

1.
Incurred approach
Cash 5,000,000

Sales 5,000,000

To record the sale in 2021.

Warranty expense(14%x5,000,000) 700,000

Estimated warranty liability 700,000

To record the warranty expense in 2021.

Estimated warranty liability 200,000

 Cash 200,000

To record the actual warranty repairs.

Cash 9,000,000

Sales 9,000,000

To record the sale in 2022.

Warranty expense(14%x 9,000,000) 1,260,000

Estimated warranty liability 1,260,000

To record the warranty expense in 2022.

Estimated warranty liability 560,000

Cash 560,000

To record the actual warranty repairs.

2. Accrual approach

Cash 5,000,000

Sales 5,000,000

To record the sale in 2021.

Warranty expense(14%x5,000,000) 700,000

Estimated warranty liability 700,000

To record the warranty expense in 2021.

Estimated warranty liability 200,000

Cash 200,000

To record the actual warranty repairs.

 Estimated warranty liability(700,000-200,000) 500,000

Estimated warranty expense 500,000

To record the difference.

Cash 9,000,000

Sales 9,000,000

To record the sale in 2022.

Warranty expense(14%x 9,000,000) 1,260,000

Estimated warranty liability 1,260,000

To record the warranty expense in 2022.

Estimated warranty liability 560,000

Cash 560,000

To record the actual warranty repairs.

Estimated warranty liability(1,260,000- 700,000

560,000)

Estimated warranty expense 700,000

To record the difference.

3.
Warranty expense
2021 700,000
2022 1,260,000 1,960,000
Actual warranty expense
2021 200,000
2022 560,000 760,000
Estimated warranty liability - December 31, 2022 1,200,000
4.
Breakdown of sales made evenly in 2021
January 1, 2021(5,000,000 x ½) 2,500,000
July 1, 2021 (5,000,000 x ½) 2,500,000
Total sales in 2021 5,000,000

Breakdown of sales made evenly in 2022

January 1, 2022(9,000,000 x ½) 4,500,000
July 1, 2022 (9,000,000 x ½) 4,500,000
Total sales in 2022 9,000,000

Warranty expense related to 2021 sales

2021
First contract year of January 1, 2021 sales (2,500,000x4%) 100,000

First contract year of July 1, 2021 sales (2,500,000x4%x6/12) 50,000

2022
First contract year of July 1, 2021 sales (2,500,000x4%x6/12) 50,000

Second contract year of January 1, 2021 sales (2,500,000x10%) 250,000

Second contract year of July 1, 2021 sales (2,500,000x10%x6/12) 125,000

2023 125,000
Second contract year of July 1, 2021 sales (2,500,000x10%x6/12)

Total warranty expense for 2021 700,000

Warranty expense related to 2022 sales

2022
First contract year of January 1, 2022 sales (4,500,000x4%) 180,000

First contract year of July 1, 2022 sales (4,500,000x4%x6/12) 90,000

2023
First contract year of July 1, 2022 sales (4,500,000x4%x6/12) 90,000

Second contract year of January 1, 2022 sales (4,500,000x10%) 450,000

Second contract year of July 1, 2022 sales (4,500,000x10%x6/12) 225,000

2024
Second contract year of July 1, 2022 sales (4,500,000x10%x6/12) 225,000
 Total warranty expense for 2022 1,260,000

5. 2021 sales still under warranty after December 31, 2022

Second contract year of July 1, 2021 sales 125,000
2022 sales still under warranty after December 31, 2022
First contract year of July 1, 2022 sales 90,000
Second contract year of January 1, 2022 sales 450,000
Second contract year of July 1, 2022(225,000+225,000) 450,000
Estimated warranty liability - December 31, 2022 1,115,000
Estimated warranty liability - per book 1,200,000
Decrease in warranty liability ( 85,000)

Estimated warranty liability 85,000

Warranty expense 85,000
To record the adjustment of warranty expense of 2022.

Problem 3-3

In 2021, Plumpton Company started selling new computers that carried a 2-year warranty
against defects.

Based on the manufacturer’s recommendations, the entity estimated warranty cost as

percentage of sales.

First year of warranty 3%

Second year of warranty 9%

Sales and actual warranty repairs were:

2021 2022
Sales 5,000,000 7,000,000
Actual warranty repairs 100,000 250,000

Required:
1. Prepair journal entries to record the transactions for 2021 and 2022;
2. Analyze the estimated warranty liability on December 31, 2022 to ascertain if the actual
repairs approximate the estimate. The sales and repairs occur evenly throughout the
year.
3. Prepare the adjustment of the estimated warranty liability on December 31, 2022.

Answer:

1.
Cash 5,000,000
 Sales 5,000,000

To record the sale in 2021.

Warranty expense(12%x5,000,000) 600,000

Estimated warranty liability 600,000

To record the warranty expense in 2021.

Estimated warranty liability 100,000

Cash 100,000

To record the actual warranty repairs.

Cash 7,000,000

Sales 7,000,000

To record the sale in 2022.

Warranty expense(12%x 7,000,000) 840,000

Estimated warranty liability 840,000

To record the warranty expense in 2022.

Estimated warranty liability 250,000

Cash 250,000

To record the actual warranty repairs.

2.

Breakdown of sales made evenly in 2021

January 1, 2021(5,000,000 x ½) 2,500,000
July 1, 2021 (5,000,000 x ½) 2,500,000
Total sales in 2021 5,000,000
 Breakdown of sales made evenly in 2022
January 1, 2022(7,000,000 x ½) 3,500,000
July 1, 2022 (7,000,000 x ½) 3,500,000
Total sales in 2022 7,000,000

Warranty expense related to 2021 sales

2021
First contract year of January 1, 2021 sales (2,500,000x3%) 75,000

First contract year of July 1, 2021 sales (2,500,000x3%x6/12) 37,500

2022
First contract year of July 1, 2021 sales (2,500,000x3%x6/12) 37,500

Second contract year of January 1, 2021 sales (2,500,000x9%) 225,000

Second contract year of July 1, 2021 sales (2,500,000x9%x6/12) 112,500

2023 112,500
Second contract year of July 1, 2021 sales (2,500,000x9%x6/12)

Total warranty expense for 2021 600,000

Warranty expense related to 2022 sales

2022
First contract year of January 1, 2022 sales (3,500,000x3%) 105,000

First contract year of July 1, 2022 sales (3,500,000x3%x6/12) 52,500

2023
First contract year of July 1, 2022 sales (3,500,000x3%x6/12) 52,500

Second contract year of January 1, 2022 sales (3,500,000x9%) 315,000

Second contract year of July 1, 2022 sales (3,500,000x9%x6/12) 157,500

2024
Second contract year of July 1, 2022 sales (3,500,000x9%x6/12) 157,500

Total warranty expense for 2022 840,000

●
Warranty expense
2021 600,000
2022 840,000 1,440,000
Actual warranty expense
 2021 100,000
2022 250,000 350,000
Estimated warranty liability - December 31, 2022 1,090,000

3.
2021 sales still under warranty after December 31, 2022
Second contract year of July 1, 2021 sales 112,500
2022 sales still under warranty after December 31, 2022
First contract year of July 1, 2022 sales 52,500
Second contract year of January 1, 2022 sales 315,000
Second contract year of July 1, 2022(157,500+157,500) 315,000
Estimated warranty liability - December 31, 2022 795,000
Estimated warranty liability - per book 1,090,000
Decrease in warranty liability ( 295,000)

Estimated warranty liability 295,000

Warranty expense 295,000
To record the adjustment of warranty expense of 2022.

Problem 3-4

Sony Company sells stereos under a 2-year warranty contract that requires the entity to replace
defective parts and provide free labor on all repairs.

During 2020, 1,000 units were sold at P9,000 each.

In 2021, the entity sold an additional 900 units at P9,250 each.

Sales occurred on the last day of the year for both 2020 and 2021.

Based on past experience, the estimated 2-year warranty costs are P200 for parts and P250 for
labor per unit.

It is also estimated that 40% of the warranty expenditures will occur in the first year and 60% in
the second year.

Actual warranty expenditures were:

2021 2022
Stereos sold in 2020 180,000 280,000
Stereos sold in 2021 190,000

Required:
1. Prepare journal entries for 2020, 2021 and 2022.
2. Analyze the estimated warranty liability to prove the reasonable accuracy of the balance
 on December 31, 2022.
3. Prepare the adjustment of the estimated warranty liability on December 31, 2022.

Answer:
1.

Cash 9,000,000

Sale 9,000,000

To record the sale on 2020

Cash

Sale

To record the sale on 202

Problem 3-5

Dawson Company manufactures television components and sells them with a 6-month warranty
under which defective components will be replaced without charge.
On January 1, 2021, the warranty liability had a balance of P620,000.

By June 30, 2021, the warranty liability on January 1, 2021 had been reduced to P120,400 by
debits for estimated net cost of components returned that had been sold in 2020.

The entity started out in 2021 expecting 7% of sales to be returned. However, due to the
introduction of new models during the year, this estimated percentage of returns was increased
to 10% on May 1.

It is assumed that no components sold during a given month are returned in that month.

Each component is stamped with a date at time of sale so that the warranty may be properly
administered.

The following table of percentage indicates the likely pattern of sales returns during the 6-month
period of the warranty, starting with the month following the sale of components.

Month following sale Percentage of total returns expected

First 30%
Second 20%
Third 20%
Fourth through sixth - 10% each month 30%
100%

Gross sales of components for the first six months of 2021 were:

Month Amount Month Amount

January 4,200,000 April 3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 1,900,000

The warranty also covers the payment of freight cost on defective components returned and on
the new components sent out as replacement.

The freight cost runs approximately 5% of the sales price of the components returned.

The manufacturing cost of the components is roughly 70% of sales price, and the salvage value
of returned components averages 10% of their sales price.

Returned components on hand on January 1, 2021 were thus valued in inventory at 10% of their
original sales price.

Required:
1. Determine the estimated sales returns subsequent to June 30, 2021.
 2. Determine the required estimated warranty liability on June 30, 2021.
3. Prepare the adjustment of the estimated warranty liability on June 30, 2021.

Problem 3-6

Precise Company sells an electric timer that carries a 90-day unconditional warranty against
product failure. The warranty costs of known failures have already been reflected in the records.

Based on a reliable statistical analysis, 2% of units sold will require an average cost of P150 per
unit.

October November December

Units sold 32,000 28,000 40,000
Known product failurs from sales of:
October 160 320 160
November 80 280
December 180

Required:
Prepare a journal entry to record the estimated liability for warranty on December 31.

Problem 3-7

Anneliese Company sells televisions at an average price of P9,000 and also offers a separate
three-year warranty contract for P900 that requires the entity to perform periodic services and
replace defective parts.
During 2021, the entity sold 300 televisions sets and 270 extended warranty contracts for cash.

The entity estimated the three-year warranty cost as P200 for parts and P400 for labor and
accounts for the sale of warranty separately.

The sale occurred on December 31, 2021. The entity recognized income from the sale of
warranty on a straight line basis.

In 2022, the entity incurred actual cost relative to the warranty of P20,000 for parts and P40,000
for labor.

Required:
1. Prepare journal entries in 2021 and 2022
2. How is the unearned revenue from warranty contracts presented on December 31,
2022?

Problem 3-8
Hanna Company reported warranty expense of P1,900,000 for the current year. The warranty
liability account increased by P200,000 during the current year.

What amount should be reported for actual warranty expenditures during the current year?

a. 1,900,000
b. 1,700,000
c. 2,100,000
d. 0

Problem 3-9

Pink Company had a warranty liability of P350,000 at the beginning of the current year and
P310,000 at the end of the current year. Warranty expense was based on 4% of sales which
amounted to P50,000,000 for the current year.

What amount of warranty expenditures was incurred for the current year?

a. 2,040,000
b. 1,900,000
c. 2,000,000
d. 0

Problem 3-10

Carpet Company had a balance of P800,000 in the estimated warranty liability account on
December 31, 2021. The warranty expenditures totaled P2,500,000 for 2022. The warranty
expense was calculated at 6% of sales. Sales amounted to P40,000,000 for 2022.

What amount should be reported as estimated warranty liability on December 31, 2022?

a. 2,400,000
b. 3,200,000
c. 700,000
d. 0

Problem 3-11

Mile Company sells washing machines that carry a three-year warranty against manufacturer’s
defects. Based on entity experience, warranty costs are estimated at P300 per machine.

During the current year, the entity sold 2,400 washing machines and paid warranty costs of
P170,000.
 1. What amount should be reported as warranty expense for the current year?

a. 170,000
b. 240,000
c. 550,000
d. 720,000

2. What amount should be reported as estimated warranty liability at year-end?

a. 550,000
b. 720,000
c. 170,000
d. 0

Problem 3-12

Bold Company estimated annual warranty expense at 2% of annual net sales. The net sales for
the current year amounted to P4,000,000.

At the beginning of current year, the warranty liability was P60,000 and the warranty payments
during the current year totaled P50,000.

1. What amount should be reported as warranty expense for the current year?

a. 70,000
b. 50,000
c. 80,000
d. 60,000

2. What amount should be reported as estimated warranty liability at year-end?

a. 10,000
b. 70,000
c. 80,000
d. 90,000

Problem 3-13

On April 1, 2021, Ash Company began offering a new product for sale under a one-year
warranty.

Of the 50,000 units in inventory with similar products, the entity estimated that the average
warranty cost per unit sold would be P80.
Actual warranty costs incurred from April 1 through June 30, 2021 totaled P700,000.

1. What amount should be reported as warranty expense for 2021?

a. 2,400,000
b. 4,000,000
c. 2,000,000
d. 1,200,000

2. On June 30, 2021, what amount should be reported as estimated liability?

a. 1,600,000
b. 3,300,000
c. 1,700,000
d. 900,000

Problem 3-14

Villa Company estimated annual warranty expense at 8% of net sales. The following data relate
to the current year:

Warranty liability, January 1

Before adjustment 100,000 debit
After adjustment 540,000 credit

What amount should be reported as net sales for the current year?

a. 8,000,000
b. 6,750,000
c. 5,500,000
d. 1,250,000

Problem 3-15

Wall Company sold a product under a two-year warranty. The estimated cost of warranty repairs
is 2% of net sales.

During the first two years in business, the entity made the following sales and incurred the
following warranty repair costs:

2021 2022
Net sales 2,500,000 3,000,000
Total repair cost incurred 45,000 50,000
What amount should be reported as warranty expense for 2022?

a. 60,000
b. 50,000
c. 10,000
d. 59,000

Problem 3-16

Bass Company manufactures high-end home electronic systems. The entity provides a one-
year warranty for all products sold.

The entity estimated that the warranty cost is P200 per unit sold and reported a liability for
estimated warranty cost of P650,000 at the beginning of the year.

During the current year, the entity sold 5,000 units for a total of P9,000,000 and paid warranty
claims of P750,000 on current and prior year sales.

What amount should be reported as estimated warranty liability at year-end?

a. 250,000
b. 350,000
c. 900,000
d. 750,000

Problem 3-17

In 2021, Dubious Company began selling a new line of products that carry a two-year warranty
against defects.

Based upon past experience with other products, the entity estimated warranty costs as a
percentage of peso sales.

First year of warranty 2%

Second year of warranty 5%

2021 2022
Sales 5,000,000 7,000,000
Actual warranty cost 100,000 300,000

1. What amount should be reported as warranty expense for 2021?

a. 350,000
b. 100,000
 c. 175,000
d. 150,000

2. What amount should be reported as estimated warranty liability on December 31, 2021?

a. 150,000
b. 250,000
c. 125,000
d. 0

3. What amount should be reported as warranty expense for 2022?

a. 300,000
b. 350,000
c. 490,000
d. 140,000

4. What amount should be reported as estimated warranty liability on December 31, 2022?

a. 390,000
b. 440,000
c. 490,000
d. 840,000

Problem 3-18

During 2021, Namnama Company introduced a new product carrying a two-year warranty
against defects.

The estimated warranty costs related to peso sales are 4% within 12 months following sale and
6% in the second 12 months following sale.

The entity reported sales of P5,000,000 for 2021 and P6,000,000 for 2022.

The actual expenditures incurred amounted to P150,000 for 2021 and P550,000 for 2022.

1. What amount should be reported as warranty expense for 2021?

a. 500,000
b. 200,000
c. 250,000
d. 300,000

2. What amount should be reported as estimated warranty liability on December 31, 2021?
 a. 350,000
b. 150,000
c. 100,000
d. 50,000

3. What amount should be reported as warranty expense for 2022?

a. 650,000
b. 600,000
c. 500,000
d. 550,000

4. What amount should be reported as estimated warranty liability on December 31, 2022?

a. 360,000
b. 400,000
c. 240,000
d. 100,000

Problem 3-19

Cyprus Company started business in 2021. The entity sells printers with a three-year warranty
and estimated its warranty cost as a percentage of peso sales.

Based on past experience, it is estimated that 3% will be repaired during the first year of
warranty, 5% will be repaired during the second year of warranty and 10% will be repaired in the
third year of warranty.

In 2021 and 2022, the entity was able to sell 7,500 units and 10,000 units, respectively at
P4,000 per unit.

The entity incurred actual repair costs of P800,000 and P2,400,000 in 2021 and 2022,
respectively. Sales and repairs incurred evenly throughout the period.

1. What amount was recorded as estimated warranty liability on December 31, 2022?

a. 5,400,000
b. 7,200,000
c. 9,400,000
d. 4,800,000

2. After testing the adequacy of the warranty cost, what amount should be reported as
estimated warranty liability on December 31, 2022?
 a. 9,675,000
b. 9,600,000
c. 9,300,000
d. 8,100,000

3. What amount should be reported as adjusted warranty expense for 2022?

a. 7,200,000
b. 7,475,000
c. 6,925,000
d. 7,400,000

Problem 3-20

1. The accrual approach in accounting for warranty

a. Is required for income tax reporting

b. Is frequently justified on the basis of expediency
c. Finds the expense account being charged when the seller performs in
compliance with the warranty
d. Represents accepted practice and should be used whenever the warranty is an
integral and inseparable part of the sale.
2. Which of the following best describes the accrual approach of accounting for warranty
cost?

a. Expensed when paid

b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred

3. Which of the following best describes the expense as an incurred approach of

accounting for warranty cost?

a. Expensed based on estimate in year of sale

b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred

4. What is the classification of the estimated warranty liability in the three-year warranty?

a. Noncurrent
b. Current
c. Partly current and partly noncurrent
 d. No need for disclosure

5. Which of the following is a characteristic of the accrual of warranty but not the sale of
warranty?

a. Warranty liability
b. Warranty expense
c. Unearned warranty expense
d. Warranty revenue