PROBLEM 3-5

an Problem 3-5 (AICPA Adapted) components will be replaced without charge. Dawson Company manufactures television components sells them with a 6-month warranty under which detecting On January 1, 2020, the warranty liability had a balance P620,000 by debits for estimated net cost of components returned that By June 30, 2020, this balance had been reduced to P120,400 had been sold in 2019. The entity started out in 2020 expecting 7% of sales to be during the year, this estimated percentage of returns was returned. However, due to the introduction of new models increased to 10% on May 1. It is assumed that no components sold during a given month are returned in that month. Each component is stamped with a date at time of sale so that the warranty may be properly administered. The following table of percentages indicates the likely warranty, starting with the month following the sale of pattern of sales returns during the 6-month period of the components. Percentage of total Month following sale First Second Third Fourth through sixth - 10% each month returns expected 30% 20 20 30 100% Gross sales of components were as follows for the first six months of 2020: Month January February March Month April May June Amount Amount 4,200,000 4,700,000 3,250,000 3,900,000 2,400,000 1,900,000 The warranty also covers the payment of freight cost on defective components returned and on the new components sent out as replacements. The freight cost runs approximately 5% of the sales price of the components returned. The manufacturing cost of the components is roughly 70% of sales price, and the salvage value of returned components averages 10% of their sales price. Returned components on hand on January 1, 2020, were thus valued in inventory at 10% of their original sales price. Required: 1. Determine the estimated sales returns subsequent to June 30, 2020 2. Determine the required estimated warranty liability on June 30, 2020. 3. Prepare the adjustment of the estimated warranty liability on June 30, 2020