- Record transactions related to product warranties
Estimated product warranty payable When companies sell products such as computers, often they must guarantee against defects by placing a warranty on their products. When defects occur, the company is obligated to reimburse the customer or repair the product. For many products, companies can predict the number of defects based on experience. To provide for a proper matching of revenues and expenses, the accountant estimates the warranty expense resulting from an accounting period’s sales which will be used as a reserve to pull actual warranty expenses from at a later date. The debit is to Warranty Expense and the credit to Estimated Warranty Payable (or Liability).
To illustrate, assume that a company sells personal computers and warrants all parts for one year. The average price per computer is $1,500, and the company sells 1,000 computers this year. The company expects 10% of the computers to develop defective parts within one year. By the end of the year, customers have returned 40 computers sold that year for repairs, and the repairs on those 40 computers have been recorded. The estimated average cost of warranty repairs per defective computer is $150. To arrive at a reasonable estimate of product warranty expense, the accountant makes the following calculation:
| Number of computers sold | 1,000 |
|---|---|
| Percent estimated to develop defects | x 10% |
| Total estimated defective computers | 100 |
| Deduct computers returned as defective to date | – 40 |
| Estimated additional number to become
defective during warranty period |
60 |
| Estimated average warranty repair cost per computer: | x $ 150 |
| Estimated warranty payable | $9,000 |
The entry made at the end of the accounting period is:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| Product Warranty Expense | 9,000 | |||
| Estimated Warranty Payable | 9,000 | |||
| To record estimated product warranty expense. |
When a customer returns one of the computers purchased for repair work during the warranty period, the company debits the cost of the repairs to Estimated Product Warranty Payable. For instance, assume that Evan Holman returns his computer for repairs within the warranty period. The repair cost includes parts $40, and labor $160. The company makes the following entry:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| Estimated Warranty Payable | 200 | |||
| Repair Parts Inventory | 40 | |||
| Wages Payable | 160 | |||
| To record replacement of parts under warranty. |