Question - Company sells a machine for $6,500 under a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2010 (warranty expense is incurred 30% in 2010, 20% in 2011 and 50% in 2012). As a result of product testing, the company estimates that the warranty cost is $400 per machine ($250 parts and $150 labor).
Assuming that actual warranty costs are incurred exactly as estimated, what is the correct journal entries that would be made under application of the expense warranty accrual method for the following:
a) Warranty costs incurred in 2010?
b) Warranty costs incurred in 2011?