Big Dots provides a one-year warranty with all its products it sells. It estimates that it will sell 350,000 units of its product for the year ended December 31, 2016, and that its total revenue for the product will be $105,000,000. It also estimates that 75% of the product will have no defects, 5% will have major defects, and 20% will have minor defects. The cost of a minor defect is estimated
to be $6 for each product repaired, and the cost for a major defect cost is about $21. The company also estimates that the minimum amount of warranty expense will be $1,500,000 and the maximum will be $6,000,000. Prepare the journal entry for 2016 under the warranty.
What will be an ideal response?
Answer:
Warranty Expense
1,575,000
Warranty Liability
1,575,000
Minor repairs: 350,000 unit × 5% × $6 = $105,000
Major repairs: 350,000 unit × 20% × $22 = 1,470,000
Total 575,000
You might also like to view...
What type of business entity is an organization providing limited liability to partners without restrictions of limitedpartnership often used by lawyers and accountants?
a. Limited partnership b. General partnership c. Limited liability partnership d. Limited liability company
________ means that managers or owners of a company know more about the future performance of the company than potential outside lenders
A) Symmetric information B) External financing C) Asymmetric information D) Two-sided information