In Western reviewed their estimated warranty costs which at that time was 5% of sales. This estimated was based upon the warranty accrual method. In 2016 net sales were $3,250,000 they recorded warranty expense of $162,500. Due to some pending changes in product improvement and certain economic factors the company saw a drastic drop in their warranty claims for 2017. The company decided for 2017 to reduce the estimate to 3% of sales. In 2017 Western reported net sales of $3,500,000.
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Required:
1) How should the company report the change and why?
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2) Prepare any necessary journal entries for 2016 or 2017 to account for the change.
What will be an ideal response?
1) The company should report the change prospectively because it is a change in estimate. The change was decided at the end of 2016 so going forward the change will take effect for the current (2017) forward.?2) No additional journal entries for 2016 due to change.2017:
| Warranty Expense ($3,500,000 x 3%) | 105,000 | ? | |
| ? | Estimated Warranty Liability | ? | 105,000 |
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