How to Record Warranty Costs in Journal Entry

The company should record a journal entry with a credit to Estimated Warranty Payable for $15,900.

When a company estimates warranty costs at 3% of monthly sales, it needs to record this expense in the financial records. The journal entry to record the warranty expense is as follows:

Warranty Expense A/c Dr $15,900

To Estimated Warranty Payable/Liability A/c $15,900

This entry is made to recognize the estimated amount of warranty costs that the company expects to incur based on monthly sales.

The computation to arrive at the $15,900 warranty expense is calculated as follows:

Monthly sales x Warranty estimated percentage = $530,000 x 3% = $15,900

By recording the warranty expense, the company is recognizing the potential liability it has for honoring warranties and providing replacement products to customers when needed.