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Warranty Payable Journal Entries

Brian Krogol
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Alright. So now we're gonna see how the estimated warranty payable is similar to the percentage of sales method that we used when we did our allowance for doubtful accounts. Remember we did allowance for doubtful accounts was the percentage of sales method where we said, okay, based on these number of credit sales, there's a percent that we don't think we're going to collect and we took our bad debt expense right away. What we're gonna do the same thing here, except we're talking about warranties, how much we expect based on the level of sales, how much of that level of sales, we expect a percentage to be paid as a warranty expense in the future. Okay, So let's go ahead and see this example, drones International sells drones with a one year warranty based on past experience, drones expects warranty costs to equal approximately 4% of sales. So remember when we did those bad debt expense, we were given a percentage of sales that were going to be bad debt. What's the same thing here? We're expecting a percentage of those sales to be paid in the future as warranty costs. Okay, During december, drones International had $2 million in sales. Alright, so what we're gonna do is we're gonna take an entry for our revenue, we had revenue of $2 million, but we're also gonna have to take our warranty expense. Right now, based on this estimation. So let's find out. Well, first, let's do our revenue part of our entry. We know we got cash, let's say or accounts receivable in the amount of two million. And we had revenue of two million. Right, so that would be a credit to revenue debit to cash. But what about the warranty? We also have to take our expense for warranty. So let's see how much that's gonna be. We had two million in sales. So this is the warranty expense. Two million times the 4%,, 4%, 0.04. So that's gonna be our warranty expense. So two million times .04. Well, our warranty expense is going to be $80,000. That means over the next one year when we're paying off, when we're repairing or replacing drones that were not up to quality. Well, we're gonna expect to spend $80,000 in those repairs and replacements. So we had our journal entry for revenue over here. Now let's make our journal entry for our warranty expense. We're going to debit warranty expense. It's an expense. So it's got to have a debit balance and that's going to be in the amount of 80,000 and we're going to credit our estimated warranty payable. Right, This is a liability that's going on to our balance sheet In the amount of 80,000. Okay, So notice we made two journal entries here, one for our revenue, whoops. One for our revenue and one for our related warranty expense. Okay, so what did we see happen? We had our cash going up in our assets by two million. And we had our equity going up for those revenues of two million. But then we also had the expense that we took. Now this 80,000 estimated expense. This is the warranty expense made our uh equity go down right expenses. And we now have a liability. So the warranty payable is a liability and we stay balanced here, right? Because the warranty payable and the warranty expense, those are on the same side in opposite directions and then the cash and the revenue going up. Cool, Alright, let's go ahead and see what happens in january of the next year When the customers finally exercise some of that money, some of those warranties to get replacements of the product. So it says in January, customers exercised warranties for replacement products at a cost to drones international of $6,000. So this is within the warranty period, right? They had a one year warranty and in January, some of those warranties got exercised. So what we're gonna do, we don't take an expense in january, right? We already took the expense when we sold the product, we took the expense last year when we had the revenue, But now we're in January. So what we're gonna do is reduce the liability because they, we estimated that this was gonna happen right? We already expected these, these warranties to be exercised. So we don't expect this amount to be exercised again, right? This was a portion of that 80,000 that we expected to be exercised. So we're gonna reduce our liability because this is taking away from the total amount we expected. So we're gonna reduce it by the 6000. Are our liabilities going down by 6000 And our cash is going down by 6000 because we had to actually physically pay money to replace these these products, right? We had to to make new new products. Whatever it might have been could have been cash accounts payable, maybe two to a vendor who's gonna fix them for us, whatever it might be, we have to reduce our cash there. Okay, so that's about it for our warranties. Why don't we do some practice problems to really drill this in? Alright, let's do that now in the next video.