All right. Here we are with the last
example for chapter
nine and this one we're dealing with
warranties and so i'm going to show you
a couple variations of this just to kind
of make sure you get the full picture,
um but let's just start with the main
story which is on december 1st
victor company sold inventory at a cost
of with a cost of 2,500
to a customer for four thousand
dollars cash.
Victor company offers a customer
warranty for parts and services for one
year
based on historical evidence a victor
company estimates that four percent of
the sales will return
for warranty's services and then on
january 31st
of the following year a customer
returned the inventory
for a service cost of 150 of labor
covered
under the warranty, so let's do the first
part which is the sale that's the
the obvious one. So december 1st we're
going to say cash of 4,000
because that's what we got and we're
going to the counterpart of that cash
the credit would be
sales revenue for four thousand and then
we also got rid of the inventory and we
need to expense that so another debit
would be cogs
or cost of goods sold for 2,500 and then
the inventory would be the crediting
account
for 2500 so that takes care of the sale
then we get to the 1231 adjustment
that we need to adjust for warranties
remember we're assuming that four
percent of our sales are going to come
back
for warranty services, so we need to put
that away but we go ahead and need to
expense it because we need to expense it
in the same period in which we
generated that revenue. So 12 31
let's calculate what that's going to be
so 4,000 is our revenue
that's how much we sold times the 4
percent that we think is going to come
back that's going to give us 160
that we need to set aside for warranty,
so we're going to go ahead and expense
it again
our debit is going to be warranties
expense
of 160 and then we're going to put it
into because we're not actually doing it
right now we're not losing anything
right now we're going to set it aside
because we're assuming that's what we're
going to owe, so that is going to be
warranties
payable of 160, so that way when we
actually do
have inventory coming back that's where
we'll draw it from first.
So then on january 31st we actually do
have some coming back and it's going to
cost us 150
to fix it and so in order to do that we
would do
december 31st take it out of warranties
payable for
150 and then take it out of cash of 150
to fix
it. All right. That's the the most basic
form
um if it's within what we put into
warranties payable, so we put in 150
we ended up needing excuse me we put in
160 we ended up needing 150
so that was pretty straightforward. Now
let's look at something a little bit
different,
so everything's the same except this
time on january 31st
of the following year the customer
returned the inventory for services
costing 200.
Okay. So the first journal entry is the
same we still sold
it for four thousand it cost us twenty
five hundred we still have four percent
warranty we're expecting so we're
gonna go ahead and put that in there
that doesn't change it's still 160 but
this time they brought it back it was
200 it cost us. So january 31st
again we're going to put warranties
payable we're going to take it out of
warranties payable but we can only take
out what we have in warranties payable
which is 160
we can that's all we can take out but
cash is going to cost
us 200 so what credit cash for 200.
now our debits and our credits are not
equal we're off by 40,
so what are we going to call that 40
well that 40
is different than the 60 because the 60
that we put in in warranties payable has
already been expensed
this 40 has not been expensed yet so we
need to continue
expensing any overage that we have so
we're going to put that into warranty's
expense.
So that's what happens if it's a little
if it's more than what we put into
warranties payable.
Now let's take it one step further and
read this
last paragraph, let's assume
victor company sold more inventory on
december 1st
of the second year again with a cost of
2500
to a customer for 4,000 they remain
estimating their returns for warranty to
be four percent of sales,
so if we sold it again if we sold more
the second year
we're going to have the same journal
entry, so cash 4,000
sales revenue 4,000 cogs of 2500
inventory of 2500, that doesn't change
then we get to our 1231 of the second
year adjustment.
So when you do another calculation again
this year we sold four four thousand
dollars in revenue
times the 0.04 gives us 160.
Now pause here because that 160 is what
we need to expense and warranties for
the year
however on 12-31 of the second year
we have already got expenses if you look
we have 40 already in
expense so of the 160 40 has already
actually been expensed this year
so what we need to do is expense the
remaining amount so it'd be 160
minus the 40, that'll give us 120. So
our
journal entry for the end of year two 12
31 of year two
would actually be warranties expense of
120
and warranties payable of 120 because if
you add up the expenses that will give
us 160 for the year,
so please please please pay attention to
that because if you've already got some
expenses earlier in the year
you need to take that out of your
calculations. So hopefully that made
sense these these three examples
if you have any questions please
leave us a comment below you all have a
good one.