Question

BE 13-13(L03) Streep Factory provides a 2-year warranty with one of its products which was first sold in 2017. Streep sold \(1,000,000 of products subject to the warranty. Streep expects \)125,000 of warranty costs over the next 2 years. In that year, Streep spent $70,000 servicing warranty claims. Prepare Streep’s journal entry to record the sales (ignore cost of goods sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs.

Short answer

The warranty expense is recorded at $55,000

Step-by-step solution

Meaning of Journal Entry

A journal entry isa detailed record of financial transactions in a business. Recording of a journal entry contains Date or Transaction Number, Particulars, Debit, and Credit columns.The debit amount and the credit amount should be equal. A short narration is written at the end of a journal entry.

Journal Entries

Transaction No.	Accounts and Explanations	Debit	Credit
1	Cash / Accounts Receivable	$1,000,000
	Sales Revenue		$1,000,000
	(To record sales revenue)
2	Warranty Expenses	$70,000
	Inventory		$70,000
	(To record the warranty expenses)
3	Warranty Expenses($125,000-$70,000)	$55,000
	Warranty Liability		$55,000
	(To record the adjusting entry)