Task: The Fairly Reliable Manufacturing Company offers a 3-year warranty with all of its products. The Company estimates its warranty costs at 5% of sales and assumes that warranty claims will occur equally over the 3-year warranty period. However, the company does not remove any unused estimated liability under warranties balance until the full 3-year period has elapsed.
The following data is available pertaining to sales and warranty claim costs:
2006 2007 2008 2009
Sales $9,000,000 $10,000,000 $11,000,000 $12,000,000
Actual warranty costs incurred as of December 31, 2008 350,000 215,000 -0- -0-
Actual warranty costs incurred during 2009 175,000 195,000 210,000 -0-
All warranty claims are paid by debiting the Estimated Liability Under Warranties account.
Instructions:
For simplicity, assume that all sales are made on December 31.
Assume that all warranty expenses have been properly recorded through 2008.
1) Prepare the journal entry to properly record the company's warranty expense for 2009.
2) Prepare a partial balance sheet showing how the liability for warranty should be presented.
[Hint: First compute the balance in the estimated liability under warranties account as of January 1, 2009.]