Question

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 6% of sales. Sales for the month of December are $440,000. Actual warranty expenditures in January of the following year were $15,000 Required: 1. Does this situation represent a contingent liability? Yes or No Yes No

Answer 1

WORKING NOTES: 1
	Total Sale of Notebook Computer	$               4,40,000
	Projected Warranty Expenditures = 6% of $ 440,000	$                  26,400
SOLUTION 1:
	This situation is not a contingent liability
	Answer = No
SOLUTION 2:
Journal Entries
Transaction	Account Title and explanation	Debit	Credit
1	Warranty Expenses	$                  26,400
	To Estimated Warranty Liabilites		$                     26,400
2	Estimated Warranty Liabilites	$                  15,000
	To Inventory		$                     15,000
SOLUTION 3: (4)
	CALCULATION OF BALANCE OF WARRANTY LIABILITY
	Estimated Warranty Liabilites =	$                  26,400
	Less: Expenses incurred in the current year	$                  15,000
	Warranty Liability account after the entried in part 1 & part 2	$                  11,400