Question

Speer Cycle​ Sales, Inc. offers warranties on all their bikes. They estimate warranty expense at 5​% of sales. At the beginning of​ 2025, the Estimated Warranty Payable account had a credit balance of $1 900. During the​ year, Speer Cycle Sales had $303 000 in sales and had to pay out $5 900 in warranty payments. In accordance with GAAP, how much Warranty Expense should Speer Cycle Sales report on the 2025 income​ statement?

Answer 1

The provision for warranty in the current year should be

303000 * 5% = 15150 where 4000 is a current expense so a total of 19150 should be reported.

A warranty clause is a provision in a contract that typically affords a promise specifying that something is real or will manifest. In contract law, this clause can have a couple of that means, and it has a tendency to be one of the most misunderstood.

A warranty is a contingent legal responsibility, so the celebration presenting it needs to report a liability and assurance price whilst it information the associated sale of goods or offerings. As the promoting birthday party incurs real assurance fees, it expenses them towards the legal responsibility account.

The warranty price account receives debited, and the warranty legal responsibility account gets credited. The value of the alternative components and merchandise despatched to customers is debited from the warranty legal responsibility account. And it is credited to the inventory account as actual warranty claims are obtained.

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