Question

part 1
Required information [The following information applies to the questions displayed below.] Computer Wholesalers restores and resells notebook computers. It originally acquires the notebook computers from corporations upgrading their computer systems, and it backs each notebook it sells with a 90-day warranty against defects. Based on previous experience, Computer Wholesalers expects warranty costs to be approximately 5% of sales. Sales for the month of December are $450,000. Actual warranty expenditures in January of the following year were $15,500. Required: 1. Does this situation represent a contingent liability? Yes or No Yes No
part 2 part 3

Answer 1

ANSWER:

(1)

Yes, this is a contingent liability because the amount is probable and liability can be estimated reasonably

(2) & (3)

Account title	Debit ($)	Credit ($)
Warranty expense (450000 x 5%) Warranty liability	22500 .	. 22500
Warranty liability Cash	15500 .	. 15500

(4)

balance in warranty liability account = warranty expenses - warranty  liability

= $22500 - 15500

= $7000