Prepare any necessary adjusting journal entries, giving effect to the proper accounting treatment of product warranties. Support any entries with clearly detailed computations. The book shave not been closed. Identify the amount of the expense included in the determination of net income and the amount of the liability presented in the balance sheet for warranties
Milan Company, a manufacturer of heavy machinery, grants a four-year warranty on its products. The Estimated Liability for Product Warranty account shows the following transactions for the year:
Opening Balance P45,000
Provision (made at interim dates) 20,000
P65,000
Cost of servicing claims (12,000)
Ending balance (before adjustment) P53,000
A review of unsettled claims and the companys experience indicates that claims have averaged 2% of net sales per year.
The following additional information is available from the companys records at the end of the current year:
Gross Sales P2,040,000
Sales returns and allowances 40,000
Cost of goods sold P1,350,000
Requirements:
Prepare any necessary
Identify the amount of the expense included in the determination of net income and the amount of the liability presented in the balance sheet for warranties.
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