Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2018 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 2% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Sales	Actual Warranty Expenditures
$5,190,000	$35,500

Required:
1. Does this situation represent a loss contingency?
2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2018.
3. What amount should Cupola report as a liability at December 31, 2018?

Answer 1

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Part 1
This is a loss contingency
Part 2
Accounts Receivable	$   5,190,000
Sale		$   5,190,000
(To record sale on credit)
Warranty Expense	$       103,800
Estimated Warranty Liability		$       103,800
(To record warranty liability) $5,190,000*2%
Estimated Warranty Liability	$         35,500
Cash, payable etc		$         35,500
(To record actual expenditure)
Part 3
Warranty Liability as on 2018 end		$         68,300
($103,800-$35,500)