Consumer Corp. sells lawnmowers and weedwhackers that come with a two-year unlimited warranty on parts and labour for repairs. The warranty is intended to assure customers that the tools will operate as advertised. The warranty is expected to cost 2% of sales in the first year and 7% of sales in the second year, for a total of 9%. The provision for warranty has a credit balance of $172,000 at the beginning of 20X5. The following events and decisions relate to the warranty:

20X5		Sales revenue of $5,375,000 was generated from products covered by the warranty. Both the sale and the warranty provision must be recorded.
20X5		Warranty work consumed parts inventory with a cost of $17,600, and labour of $41,000.
20X6		Sales revenue from products covered by the warranty were $5,850,000. Both the sale and the warranty provision must be recorded.
20X6		Warranty work consumed parts inventory with a cost of $162,000, and labour of $341,000

Required:

1. Prepare journal entries for the events listed above. Assume all sales and actual warranty expenditures are in cash.
2. Calculate the balance of the provision for warranty at 31 December X5 and X6.
3. What warranty work is left to be done at the end of X6? Is the X6 balance appropriate with respect to future claims? What course of action would you recommend? Please provide calculations to support your answer.

Answer rating: 100% (QA)

a 20X5 Sales 5375000 Warranty provision 172000 Warran... View the full answer