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Duong-Burnett Products introduced a new line of commercial sprinklers in 2023 that carry a one-year warranty against manufacturer's defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate [tex]4 \%[/tex] of sales. Sales of the sprinklers in 2023 were [tex]\$ 3,200,000[/tex]. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:

In late 2024, the company's claims experience was evaluated, and it was determined that claims were far more than expected - [tex]5 \%[/tex] of sales rather than [tex]4 \%[/tex].

Required:

1. Assuming sales of the sprinklers in 2024 were [tex]\$ 4,300,000[/tex] and warranty expenditures in 2024 totaled [tex]\$ 109,000[/tex], prepare any journal entries related to the warranty.
2. Assuming sales of the sprinklers were discontinued after 2023, prepare any journal entries in 2024 related to the warranty.



Answer :

GinnyAnswer
Sure, let's go through the solution step-by-step based on the given information.

### Part 1: Journal Entries for 2024 when Sales Continue

#### 2023:
1. In 2023, the company expected warranty costs to be 4% of sales.
- Sales in 2023 were \[tex]$3,200,000. - Expected warranty cost = \( 3,200,000 \times 4\% = \$[/tex]128,000 \).

Journal Entry for 2023:
```
Dr. Warranty Expense: \[tex]$128,000 Cr. Warranty Liability: \$[/tex]128,000
```

#### 2024:
2. In 2024, it was discovered that the actual warranty costs were 5% of sales instead of 4%.
- Actual warranty cost for 2023 sales = [tex]\( 3,200,000 \times 5\% = \$160,000 \)[/tex].
- Difference (additional warranty cost) to be recorded in 2024: [tex]\( \$160,000 - \$128,000 = \$32,000 \)[/tex].

Journal Entry for 2024 to adjust for 2023 sales:
```
Dr. Warranty Expense: \[tex]$32,000 Cr. Warranty Liability: \$[/tex]32,000
```

3. Sales of sprinklers in 2024 were \[tex]$4,300,000, and warranty expenditures in 2024 totaled \$[/tex]109,000.
- Actual warranty expense for 2024 = [tex]\( 4,300,000 \times 5\% = \$215,000 \)[/tex].

Journal Entry for 2024 sales:
```
Dr. Warranty Expense: \[tex]$215,000 Cr. Warranty Liability: \$[/tex]215,000
```

4. The actual expenditure for warranties in 2024 was \[tex]$109,000. This reduces the warranty liability. Journal Entry for actual expenses in 2024: ``` Dr. Warranty Liability: \$[/tex]109,000
Cr. Cash (or Payables): \[tex]$109,000 ``` ### Part 2: Journal Entries in 2024 if Sales Discontinued After 2023 Assuming sales of the sprinklers were discontinued after 2023, the relevant entries would be: 1. Additional warranty liability for 2023 sales (as determined). - Total cost for warranty in 2023 sales (actual): \( \$[/tex]160,000 \).
- Already recorded in 2023: [tex]\( \$128,000 \)[/tex].
- Additional cost to be recorded: [tex]\( \$32,000 \)[/tex].

Journal Entry to adjust for 2023 additional costs:
```
Dr. Warranty Expense: \[tex]$32,000 Cr. Warranty Liability: \$[/tex]32,000
```

2. Actual expenditures in 2024 were still \[tex]$109,000. Journal Entry for actual warranty expense payments: ``` Dr. Warranty Liability: \$[/tex]109,000
Cr. Cash (or Payables): \$109,000
```

In summary, the calculated journal entries in 2024 address both the adjustment of warranty costs for previous sales and the actual warranty expenses incurred. This ensures the financial statements accurately reflect the true costs associated with the warranties provided by Duong-Burnett Products.