Estimated Warranty Payable Calculation

How is Estimated Warranty Payable calculated?

Monthly sales are $530,000. Warranty costs are estimated at 5% of monthly sales. Warranties are honored with replacement products. No defective products are returned during the month. At the end of the month, the company should record a journal entry with a credit to:

A. Sales for $26,500

B. Warranty Expense for $26,500

C. Estimated Warranty Payable for $26,500

D. Inventory for $26,500

Answer

C. Estimated warranty payable for $26,500.

Estimated Warranty Payable is calculated by taking 5% of the monthly sales, which in this case is $530,000. This means that the warranty costs amount to $26,500.

Since no defective products were returned during the month, the company sets aside $26,500 as Estimated Warranty Payable. This amount will cover the cost of honoring warranties with replacement products.

At the end of the month, a journal entry should be made to reflect the Estimated Warranty Payable, ensuring that the company's financial records accurately account for the potential liability associated with warranty claims.

By recording this entry, the company ensures that it has set aside funds to cover any future warranty claims that may arise from products sold during the month.