Explorer Supplies, Inc. had sales of $120,000 in Year 1. Explorer warrants its products and estimates warranty expense to be 3% of sales. Which of the following journal entries would be required to recognize the year-end warranty obligation?

Warranty Expense $3,600 (debit)

Warranty Provision $3,600 (credit)

Explanation:

There is no option on the customer to take the warranty or not. Thus, this type of warranty is called an Assurance type Warranty.

Assurance type Warranties are treated in terms of IAS 37 Provisions as follows:

Warranty Expense $3,600 (debit)

Warranty Provision $3,600 (credit)

Warranty Expense = $120,000 * 3% = $3,600