Question

On December 6, 2017, Norwood Co., an office equipment supplier, sold a copier for cash of $14,000 (cost $10,400) with a two-year parts and labour warranty. Based on prior experience, Norwood expects eventually to incur warranty costs equal to 5% of the selling price. The fiscal year coincides with the calendar year. On January 20, 2018, the customer returned the copier for repairs that were completed the same day. The cost of the repairs consisted of $202 for the materials taken from the parts inventory and $364 of labour that was fully paid with cash. These were the only repairs required in 2018 for this copier. Required: 1. How much warranty expense should the company report in 2017 for this copier? Warranty expense 2. How much is the warranty liability for this copier as of December 31, 2017? Warranty liability 3. How much warranty expense should the company report in 2018 for this copier? Warranty expense 4. How much is the warranty liability for this copier as of December 31, 2018? Warranty liability

Answer 1

Calculate Warranty Expense: Warranty Expense for 2017=Sale price of copier Expected warranty cost =$14,000x5% = $700 Compute Warranty Liability for this copier as of December 31, 2017 as follows: Estimated warranty liability = $700 Warranty liability is equal to the estimated warranty expense, since in 2017 there is no repair done. Therefore no reduction in warranty liability. 3. Warranty Expense for 2018 = $0 Company has already booked warranty expense in 2017, hence no warranty expense will recognize in 2018.

Estimated warranty liability = $134 Working note: Warranty liability at beginning of 2018 $700 Less: Parts cost Less: Labor cost $202 $364 Warranty liability as of December, 31, 2018 [($700 - ($202+$364)] $134 Joumal entries as follows:

Account Titles | Credit Date Dec 06 Debit $14,000 Cash Sales $14.000 Dec 06 $10.400 COGS Merchandise inventory $10.400 Dec 31 $700 Warranty Expense Estimated warranty liability $700 $566 Jan 20, 2018 Estimated warranty liability Repair parts inventory Repair labor $202 $364