Concept #1: Warranty Payable
Concept #2: Warranty Payable Journal Entries
Practice: ECB Company recently released a new product to compete with the product of TLR Company. ECB’s product carries a two-year warranty against any manufacturing defects. Based on previous market experience, ECB estimates warranty costs to equal 2% of sales. At the end of the first year on the market, total sales equaled $15 million and actual warranty costs totaled $100,000. What amount (if any) should ECB report as a liability related to this data at year-end?
Practice: The American Tire Company provides a warranty for its tire sales that cover manufacturing defects for three years or 50,000 miles, whichever comes first. ATC estimates that warranty costs during the warranty period will equal 5% of sales. During the current year, ATC made sales of $337,000. ATC received cash equal to 35% of sales and accounts receivable for the remainder. Payments to satisfy warranty claims during the year totaled $9,700. If the beginning balance in estimated warranty payable was $7,000, what would be the final balance in the estimated warranty payable?