A Company sells a machine for $3,000 under a 24 month warranty agreement that requires the company to provide all repairs at no cost to the customers. With sales being made evenly throughout the year, the company sells 800 machines in 2012. Warranty costs are expected to be paid 20% in 2012 and 80% in in 2013. As a result of product testing, the company estimates that the warranty cost is $100 per machine.

Required: Assuming the actual warranty costs are incurred exactly as estimated, what accounts and dollar amounts would be reported on the 2012 Income Statement and Balance Sheet under the accrual method?

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Originally Posted by Milmil

A Company sells a machine for $3,000 under a 24 month warranty agreement that requires the company to provide all repairs at no cost to the customers. With sales being made evenly throughout the year, the company sells 800 machines in 2012. Warranty costs are expected to be paid 20% in 2012 and 80% in in 2013. As a result of product testing, the company estimates that the warranty cost is $100 per machine.

Required: Assuming the actual warranty costs are incurred exactly as estimated, what accounts and dollar amounts would be reported on the 2012 Income Statement and Balance Sheet under the accrual method?

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What do you think

I think it should be:

Warranty Expense 149,500
Cash 20,000
Warranty Liability 129,500

The total warranty expense associated with 2012 sales would be 80,000. As far as I can tell you are being asked to specifically address warranty expenses in 2012 which will bare the entire warranty cost in the 2012 accounts so under your calculation the journals would be
DR Warranty Expense 7,550 CR Cash 7550, DR Warranty Expense 72450, CR Warranty Liability Accrued 72450

Thank you very much!