Question

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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 $510,000. Actual warranty expenditures in January of the following year were $18,500.

Does this situation represent a contingent liability?

Record the necessary entries in the Journal Entry Worksheet below. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.)

Journal entry worksheet

• Record the contingent liability for warranties.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 1

Journal entry worksheet

• Record the actual warranty expenditures.

Note: Enter debits before credits.

	Transaction General Journal Debit Credit 2

What is the balance in the Warranty Liability account after the entries in the parts above?

Answer 1

1
Yes, this situation represent a contingent liability.
A contingent liability is one which is probable and the amount can be reasonably estimated.
2
	Debit	Credit
Warranty expense	30600		=510000*6%
Warranty Liability		30600
3
Warranty Liability	18500
Cash		18500
4
Balance in the Warranty Liability	12100		=30600-18500