Question

Milford Company sells a motor that carries a three-month unconditional warranty against product failure. Based on a reliable statistical analysis, Milford knows that between the sale and the end of the product warranty period, two percent of the units sold will require repair at an average cost of $50 per unit. The following data reflect Milford's recent experience:
Oct Nov Dec Dec 31 Total
Units unsold 24000 26000 26000 76000
Known products failure from sales in:
October 130 190 170 490
November 130 220 350
December 210 210
Calculate, and prepare a journal entry to record, the estimated liability for product warranties at December 31. Assume that warranty costs of known failures have already been reflected in the records.

Answer 1

Answer: See explanation

Explanation:

Number of units sold = 76000

Percentage repair= 2%

Estimated defective units = Percentage repair × Units sold = 2% × 76000 = 1520

Actual defective units = 490 + 350 + 210 = 1050

Unclaimed warranty = Estimated defective units - Actual defective units = 1520 - 1050 = 470

Repair cost = $50

Warranty expense = 470 × $50 = $23500

The journal entry will then be:

31 December:

Debit: Product warranty expense = $23500

Credit: Estimated liability for product warranty = $23500