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siniylev [52]
3 years ago
15

Hitzu Co. sold a copier (that costs $4,800) for $6,000 cash with a two-year parts warranty to a customer on August 16 of Year 1.

Hitzu expects warranty costs to be 4% of dollar sales. It records warranty expense with an adjusting entry on December 31. On January 5 of Year 2, the copier requires on-site repairs that are completed the same day. The repairs cost $209 for materials taken from the repair parts inventory. These are the only repairs required in Year 2 for this copier. 1. How much warranty expense does the company report for this copier in Year 1? 2. How much is the estimated warranty liability for this copier as of December 31 of Year 1?
Business
1 answer:
den301095 [7]3 years ago
7 0

Answer:

warranty expense = $240

estimated warranty liability = $240

Explanation:

There is no option on the customer to take the warranty or not. Therefore this type of warranty is known as an Assurance type warranty.

Assurance type warranties are accounted for terms of IAS 37 - Provisions as follows ;

Year 1

Warranty expense $240 (debit)

Warranty Provision $240 (credit)

<em>Warranty Amount = $6,000 × 4% = $240</em>

Year 2

<em>When warranty claim is subsequently received</em>

Warranty Provision $209 (debit)

Materials $209 (credit)

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Carrying Amount $120,000 Selling Price $80,000 Costs of Disposal $5,000 Expected Future Cash Flows $90,000 Present Value of expe
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$35,000

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Under IAS 36, an asset is said to be impaired where the carrying amount is more than the recoverable amount.

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