Question: DEF, Inc. sells widgets with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase.

Required: a) DEF, Inc. estimates that if defects were detected in all products sold, repair costs would range from:

Low end of range            $2,000,000          Minor repairs

High end of range            $4,000,000          Major repairs

Assume no particular outcome within the range of $2 to $4 million is better than another. Prepare the required journal entry.

b) Using the same facts from part a) above, assume DEF, Inc. performs an analysis on the historical data of returns and estimates (based on historical data) finding that:

Estimated to be: Goods sold with no defects 75% of all goods sold

Goods sold with minor defects 20% of all goods sold

Goods sold with major defects 5% of all goods sold

Prepare the required journal entry.