Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2021 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=$5,880,000 Actual Warranty Expenditures $42,000

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 2021.

3. What amount should Cupola report as a liability at December 31, 2021?

Answer 1

1
Yes, this situation represent a loss contingency
The amount is probable and can be resonably estimated.
2
General Journal	Debit	Credit
Accounts receivable	5880000
Sales revenue		5880000
Warranty expense	117600		=5880000*2%
Estimated warranty liability		117600
Estimated warranty liability	42000
Cash, wages payable, parts and supplies, etc.		42000
3
Warranty Liability at December 31, 2021	75600		=117600-42000