Question

Hitzu Co. sold a copier (that costs $5,500) for $11,000 cash with a two-year parts warranty to a customer on August 16 of Year 1. Hitzu expects warranty costs to be 4% of dollar sales. It records warranty expense with an adjusting entry on December 31. On January 5 of Year 2, the copier requires on-site repairs that are completed the same day. The repairs cost $130 for materials taken from the repair parts inventory. These are the only repairs required in Year 2 for this copier.

1. How much warranty expense does the company report for this copier in Year 1?

2. How much is the estimated warranty liability for this copier as of December 31 of Year 1?

3. How much is the estimated warranty liability for this copier as of December 31 of Year 2?

4. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment to recognize the warranty expense on December 31 of Year 1; and (c) the repairs that occur on January 5 of Year 2.

Answer 1

The goods are sold at 11000 costing 5500. Hitzu shall recognize warranty expense of 4% in year 1.

1.

Warranty expense in Year 1 = 4% of dollar sales value = 4% of 11000 = $ 440

2.

Since no warranty expenses have been incurred for year 1, the ending balance of estimated warranty liability shall remain same i.e. $440 as of December 31, Year 1.

3.

The expense of $130 in Year 2 shall be debited to warranty liability account and not warranty expense. Hence, estimated warranty liability as of December 31 of Year 2 = 440-130 =$310

4.The required journal entries are:

Date	Journal	Debit ($)	Credit ($)
( a)	Cash	11,000
	Sales		11,000
	(To record sales)
	Cost of goods sold	5,500
	Merchandise inventory		5,500
	(To record transfer to cogs)
( b)	Warranty expense	440
	Estimated warranty liability		440
	(To recognize warranty expense)
( c)	Estimated warranty liability	130
	Repair parts inventory		130
	(To record repairs on jan 5, Year 2)

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