Lily Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Lily estimates that 4% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing or repairing a defective unit is $20. The units sold and units defective that occurred during the last 2 months of 2020 are as follows.
Months Units Sold Units Defective Prior to December 31
November 37,300 746
December 39,300 491
Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 1,237 warranty claims.

Answer and Explanation:

The journal entries are shown below:

a. On November

Warranty expense Dr $29,840  (37,300 units  × 4% × $20)

        To  Estimated  warranty payable   $29,840

(Being the warranty expense is recorded)

For recording this we debited the expense as it increase the expense and credited the estimated warranty payable as it increased the liabilities

On December

Warranty expense Dr $31,440  (39,300 units  × 4% × $20)

        To Estimated warranty payable   $31,440

(Being the warranty expense is recorded)

For recording this we debited the expense as it increase the expense and credited the estimated warranty payable as it increased the liabilities

For cost incurred

Accrued Warranty Expense $24,740

          To Cash $24,740

(Being the cash is paid)

For recording this we debited the expense as it increase the expense and credited the cash as it reduced the assets

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