Answer to Question #224205 in Accounting for becky

Question

Amerax Ltd sells tablets for cash at Ksh 80,000 each inclusive of a one-year unlimited international warranty for any manufacturers defects. The manager is concerned about the rising cost of warranties compensations and have recommend provisions to be created with effect from 2019. Estimates from the sales department indicates the following

Defect type

Percentage of units sold

Estimated cost per unit

Minor

2%

2,300

Major

0.5%

6,000

Replacement

0.1%

18,600

Summary of cash book and warranty contracts indicate the following information

Year ended

31st March

2019

31st March

2020

31st March

2021

Warranties paid (Ksh)

654,000

450,900

346,200

Warranty contract in force (units)

15,000

24,800

18,400

Required

Compute the warranty provisions required at the end of each year (6 marks)

Prepare the provisions for product warranty account

Answer 1

Solution:

This has been calculated as per the below table:

 

 

Warranty provisions required for the year 2019 = 1,419,000

Warranty provisions required for the year 2020 = 2,346,080

Warranty provisions required for the year 2021 = 1,740,640

 

Provisions for product warranty account:

Year               Account                                           Dr.                              Cr.

2019               Warranty expense A/c                   1,419,000

                                   Warranty liability A/c                                           1,419,000

(To record provision for warranty expense)

                       Warranty liability A/c                      654,000

                                    Inventory A/c                                                          654,000

(To record replacement of parts under warranty (warranties paid))    

2020               Warranty expense A/c                   2,346,080

                                   Warranty liability A/c                                           2,346.080

(To record provision for warranty expense)

                       Warranty liability A/c                      450,900

                                    Inventory A/c                                                          450,900

(To record replacement of parts under warranty (warranties paid))          

 

2021               Warranty expense A/c                   1,740,640

                                   Warranty liability A/c                                           1,740,640

(To record provision for warranty expense)

                       Warranty liability A/c                      346,200

                                    Inventory A/c                                                          346,200

(To record replacement of parts under warranty (warranties paid))