Question

in 2020, Johnson's Cycles Inc. sold 5,000 mountain bikes. For the first time, lohnson offered an in-store, no-charge, two year warranty on each bike sold. Company management estimates that the average cost of providing the warranty is 50 per unit in the first year of coverage and $11 per unit in the second year. Johnson's warranty-related expenditures totaled $36,500 for labor costs during 2020. Required: a. Prepare the summary journal entry to recognize Johnson's warranty expense in 2020 (at the end of 2020) b. Prepare the summary journal entry to recognize the warranty service provided in 2020 (as if it happened all at the end of 2020) c. Determine the total provision for warranty obligations that will be reported on the company's balance sheet at year-end 2020. Assuming that all sales transactions and warranty service took place on the last day of the year, how much of the warranty obligation will be classified as a current liability? As a non-current liability?

Answer 1

Date	Particulars	Debit ($)	Credit ($)
a.	Warranty expense	95,000
	Provision for warranty obligations [5000 * (8+11)]		95,000
	(To record warranty expense)
b.	Provision for warranty expenses	36,500
	Wages expenses		36,500
	(To record warranty service provided in 2020)

c. The total provision for warranty obligations that will be reported at year end shall be 95,000 – 36,500 = $ 58,500. Out of this amount, $ 3,500 will be reported as current obligation 5000* 8 – 36500 = 3,500 and the balance amount as non current liability = 5000*11 = $ 55,000.

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