Question 5 a Penang Audio Company warrants its products for

Question 5 a) Penang Audio Company warrants its products for one year. The estimated product warranty is 3 per cent of sales. Assume that sales totalled $800,000 for January 2015 In February, a customer received warranty repairs requiring $500 worth of parts and $1,400 worth of labour. Required: i) Journalise the adjusting entry required at 31 January 2015, the end of the first Journalise the entry to record the warranty work provided in February. i Why warranty is necessary? How is it accounted for the provision for month of the current year, to record the accrued product warranty. warranty?

Solution

(ii) Warranty policy helps to build the customers confidence to purchase the product as it promises the customer to repair or replace there damaged product within a certain period of time from the date of sale of the product

Product warranty is a liability for the company and warranty expenses should be recorded in their books of accounts when the product is sold and if it is probable that the customers may make claims under the warranty and it is possible to estimate the amount of warranty,

(i) Journal entry:-

NO.	Particulars	Dr. ($)	Cr. ($)
a)	Product Warranty Expense	24,000
	To product Warranty payable		24,000
	(to record warranty expense for Jan,3%×$8,00,000)
b)	Product Warranty Payable	1,900
	To Supplies		500
	To Wages Payable		1,400
	(to record the warrant work provided in feb)