Question

Scout Company sold $15,000 of merchandise in September with a three-month warranty. The cost to repair defects under warranty is estimated at 5% of the sales price.
The journal entry to record the estimated warranty expense for the month of September will include a:

a) debit to Product Warranty Expense for $750.
b) credit to Product Warranty Payable for $7,500.
c) credit to Product Warranty Expense for $750.
d) debit to Product Warranty Payable for $7,500.

Answer 1

Answer:

debit to Product Warranty Expense for $750.

Explanation:

A warranty is an expense to the business. As per the matching principle, the expense should be accounted for in the period it was incurred. The amount provided for as warranty is debited to the warranty expense account. The funds are meant to cater for any warranty claims. Should there be warranty claims, the amount will be credited to the warranty expenses account.

Calculating the warranty amount for the scout company.

Sales $15,000

The estimated warrant is at 5 percent

Warranty amount = 5/100 x 15,000

     =0.05 x 15000

   =$750