Question

Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 4% of sales. By the end of the first year, sales are $900,000. Actual warranty expenses incurred so far are $13,000. 1. Does this situation represent a contingent liability? OYes No 2. & 3. Record the appropriate journal entries for the warranties. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.) View transaction list Journal entry worksheet 1 2 Record warranty expense and warranty liability for the year based on 4% of sales. Note: Enter debits before credits. General Journal Credit Transaction Debit 1 Record entry View general journal Clear entry 4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3? Warranty liability

Answer 1

1

Yes,this situation represent a contingent liability.

The amount is probable and can be reasonably estimated so it is a contingent liability

2
	Debit	Credit
Warranty expense	36000		=900000*4%
Warranty Liability		36000
3
	Debit	Credit
Warranty Liability	13000
Cash		13000
4
Warranty Liability	23000	=36000-13000