Question

[The following information applies to the questions displayed below.] Michicot Co. sold a scanner/copier costing $7,500 with a two-year parts warranty to a customer on August 16, 2013, for $15,000 cash. Michicot uses the perpetual inventory system. On November 22, 2014, the scanner/copier requires on-site repairs that are completed the same day. The repairs cost $95 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2014 for this scanner/copier. Based on experience, Michicot expects to incur warranty costs equal to 3% of dollar sales. It records warranty expense with an adjusting entry at the end of each year. 1. How much warranty expense does the company report in 2013 for this copier?

Answer 1

Answer:

Michicot Co.

The warranty expense to recognize in 2013 is $450

The journal entry will be:

December 31, 2013:

Debit Warranty Expense $450

Credit Warranty Liability $450

To accrue the warranty expense for the scanner/copier sold.

Explanation:

a) Data:

August 16, 2013: Sales of scanner/copier = $15,000

Cost of scanner/copier = $7,500

Two-year warranty = 3% of $15,000 = $450

Perpetual inventory system in use

November 22, 2014 on-site repairs' cost = $95

Warranty expires August 15, 2015

b) Warranty expense relates to 2013, therefore, a warranty expense is recognized in 2013 with a Warranty Liability is made for the sum of $450 (3% of $15,000).  When the actual liability claim for this customer is received in 2014 for the sum of $95, the Warranty Liability will be credited and Inventory account adjusted with $95.

c) Recognizing the 3% of $15,000 ensures that the accrual concept and the matching principle are followed.  The revenue for this warranty relates to 2013 and the expense is also supposed to relate to 2013.