SST Jetski Corp. has sold motorized watercraft for a number of years. SST includes a three-year warranty
Question:
SST Jetski Corp. has sold motorized watercraft for a number of years. SST includes a three-year warranty on each watercraft they sell. Management estimates that the cost of providing the warranty coverage is 1% of sales in the first year and 2% of sales in each of years two and three. Other facts follow:
■ SST reported a $260,000 provision for warranty payable on its balance sheet at December 31, 2020.
■ SST’s sales for 2021 totalled $4,800,000 spread evenly throughout the year.
■ The cost to SST of meeting their warranty claims in 2021 was $240,000: $150,000 for parts and $90,000 for labour.
■ SST’s sales for 2022 totalled $5,400,000 spread evenly throughout the year.
■ The cost to SST of meeting their warranty claims in 2022 was $300,000: $180,000 for parts and $120,000 for labour. Based on recent claims history, SST revises their 2022 warranty provision to 7% of sales.
Required:
a. Prepare summary journal entries to record warranty expense and warranty claims in 2021 and 2022.
b. Determine the provision for warranty payable that SST will report as a liability on December 31, 2022.
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