Olden Motor Vehicles Ltd offers a 12-month warranty for the sale of used motor vehicles. On 1 July 2015, there was a credit balance of $70,000 in its Warranty Provision account, During the year ended 30 June 2016, Olden Motor Vehicles incurred $65,000 in warranty costs, of which $30,000 was in the form of inventory and $35,000 was for labour costs. At 30 June 2016, Olden Motor Vehicles estimated its liability for unexpired warranty contracts as $75,000.
Required:
(a) Prepare journal entries to record warranty claims during the period and end-of period adjustments to Warranty Provision account. (Hint: Credit Wages Payable for the labour costs).
(b) Why do entities offer a warranty?