General Motors of Canada Limited guarantees automobiles against defects for five years or 160,000 km, whichever comes first. Suppose GM Canada can expect warranty costs during the five-year period to add up to 3% of sales.
Assume that Forbes Motors in Waterloo, Ontario, made sales of $2,000,000 on their Buick line during 2014. Forbes received cash for 10% of the sales and took notes receivable for the remainder. Payments to satisfy customer warranty claims totalled $50,000 during 2014.
1. Record the sales, warranty expense, and warranty payments for Forbes. Ignore any reimbursement that Forbes may receive from GM Canada.
2. Post to the Estimated Warranty Payable T-account. The beginning balance was $40,000. At the end of 2014, how much in estimated warranty payable does Forbes owe its customers?