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 5% of sales. By the end of the first year, sales are $800,000. Actual warranty expenses incurred so far are $13,000 1. Does this situation represent a contingent liability? O Yes O 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 Record warranty expense and warranty liability for the year based on 5% of sales. Note: Enter debits before credits Debit Credit Transaction General Journal < Prev 10 of 40 Next > !!!

Answer 1

1. Yes, this situation represent a contingent liability. Warranty liability can be estimated and its incurrence is based on future events. 2. & 3. Credit Debit $40,000 1 Transaction General Journal Warranty expense Estimated warranty liability (To record warranty expense and warranty liability) $40,000 $13,000 Estimated warranty liability Cash (To record warranty expenditures) $13,000 Calculations are shown below: 1 Credit Debit 1=800000*5% 2 1 Transaction General Journal Warranty expense Estimated warranty liability (To record warranty expense and warranty liability) =C2 13000 Estimated warranty liability Cash (To record warranty expenditures)