Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 41

Other accrued liabilities—warranties Prist Co. had not provided a warranty on its products, but competitive pressures forced management to add this feature at the beginning of 2010. Based on an analysis of customer complaints made over the past two years, the cost of a warranty program was estimated at 0.2% of sales. During 2010, sales totaled $4,600,000. Actual costs of servicing products under warranty totaled $12,700.

Required:

a. Use the horizontal model (or a T-account of the Estimated Warranty Liability) to show the effect of having the warranty program during 2010.

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b. What type of accrual adjustment should be made at the end of 2010?

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c. Describe how the amount of the accrual adjustment could be determined.

Step 1 of 5

Other accrued liabilities–Warranties:

Accrued liabilities:

It is an accounting word for an expense item that a company has incurred however has not yet paid.

Warranties:

A liability and expense that represents the estimated amount of spending that will require by a company for repairing or replacing its products during its warranty period.