Hello,

I was just wondering how you would answer this question.

If your warranty liability account bal in 2005 is $74,900 and in 2006 claims were made where you spent $24,800 for parts and $66,000 in labour, how would you record the journal entry in 2006.

This is what I did:
Dr. Warranty liability $74,900
Cr. Cash $74,900

Dr. Warranty expense (24800+66000)-74900 = $15900
Cr. Cash $15900

Therefore the warranty liab on the B/S would be 0 at the end of the year. Is that how you do it?

First, the 74900 is the balance that was in there at the end of the prior year. You don't make entries for balances. It's already there. So your first entry doesn't exist at all - and no cash was spent on it. That was after the end-of-year adjusting entry had already been done.

As for what you spent in the 2nd year, take the whole thing out of the liability account. You are a) trying to overthink it, and b) make it net out to zero. That isn't the purpose. Make the entry for the entire amount that was spent. It will end up with a negative (debit) balance in it, which is OK.

A warranty liability is an estimated account. Any time you have an estimated account, it isn't going to equal what comes out of it later and your goal isn't to get a zero balance in it. Another adjusting entry will be made again at the end of the 2nd year which will take that balance back up to something, so it's only going to remain negative temporarily. If you've already done bad debt allowance, it's a similar type concept.