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 5% of sales. Sales for the month of December are $590,000. Actual warranty expenditures in January of the following year were $22,500. Required: 1. Does this situation represent a contingent liability

Answer 1

Answer:

Yes it does as the company expect to pay for the warranty but doesn't know as it may occur or don't dependion upon the notebook hardware and software performance over the 90-days period

Warranty expense 29,500 debit

   Warranty Liability       29,500 credit

Explanation:

We will record a warrant liability for the 5% of the mount sold. As the warranty liability is generated at the time of sale which occur in December