[TheAccountant]

Through CPAExcel’s TBSFCO0156 Journal Entry

1. Products are sold with the following warranty: the product may be returned for service free of cost to the customer any time during the year of sale and for the succeeding three calendar years. Thus if a product is sold in 20×3, the warranty covers the product through the end of 20×6. The cost to service warranty claims is estimated to be 1% of sales in the year of sale, 2% in the year following sale, 3% in the second year after sale, and 4% in the third year after sale. During 20×3, sales under warranty totaled $600,000. Assume that warranty expense is recorded as an adjusting entry at year-end. Record that entry for 20×3.

Answer: $600,000(1% + 2% + 3% + 4%) = $60,000. The entire amount of warranty expense and liability is recognized in the year of sale. When the claims are serviced, the warranty liability is reduced; no additional expense is recognized.

The entry would be:

DEBIT: Warranty expense 60,000

CREDIT: Warranty Liability 60,000

My question is that isn’t the credit of $60k to Warranty Liability actually an increase in liability instead of a reduction?

[monikernc]

yes. the entry is recognizing the liability at the beginning of the warranty period, as it says in the answer's first sentence. the second sentence is talking about the reduction of the liability as claims are paid throughout the warranty period. that entry would be the following which does not recognize any expense:

DR warranty liability
CR cash

AUD - 93
BEC - 82
FAR - 76
REG - 88

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FAR 7/25/15 76!
AUD 10/30/15 93
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[Author]

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