Question

Hitzu Co. sold a copier costing $4,800 with a two-year parts warranty to a customer on August 16, 2016, for $6,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2017, 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 2017 for this copier. Based on experience, Hitzu expects to incur warranty costs equal to 4% 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 2016 for this copier?
2. How much is the estimated warranty liability for this copier as of December 31, 2016?
3. How much warranty expense does the company report in 2017 for this copier?
4. How much is the estimated warranty liability for this copier as of December 31, 2017?
5. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment on December 31, 2016, to recognize the warranty expense; and (c) the repairs that occur in November 2017.

Answer 1

Answer:

1. $240

2. $240

3. $0

4. $31

5. August 16, 2016

Dr Cash $6,000

Cr Sales $6,000

Aug. 16, 2016

Dr Cost of goods sold $4,800

Cr Merchandise inventory $4,800

Dec 31,2016

Dr Warranty expense $240

Cr Estimated warranty liability $240

Nov. 22, 2017

Dr Estimated warranty liability $209

Cr Repair parts inventory $209

Explanation:

1. Calculation to determine How much warranty expense does the company report in 2016 for this copier

Warranty expense = 4% × $6,000

Warranty expense= $240

Therefore the amount of warranty expense that the company report in 2016 for this copier is $240

2. Calculation to determine How much is the estimated warranty liability for this copier as of December 31, 2016

Estimated warranty liability= 6% × $6,000

Estimated warranty liability= $240

Therefore estimated warranty liability for this copier as of December 31, 2016 is $240

3. The 2017 warranty expense that the company report in 2017 for this copier will be $0 because NO ADDITIONAL WARRANTY EXPENSE in the year 2017 should be reported for this copier

4. Calculation to determine how much is the estimated warranty liability for this copier as of December 31, 2017

2017 ESTIMATED WARRANTY LIABILITY

Beginning 2017 balance $240

(4%*$6,000)

Less Parts cost ($209)

Ending 2017 balance $31

Thereforea m the estimated warranty liability for this copier as of December 31, 2017 is $31

5. Preparation of the journal entries

August 16, 2016

Dr Cash $6,000

Cr Sales $6,000

Aug. 16, 2016

Dr Cost of goods sold $4,800

Cr Merchandise inventory $4,800

Dec 31,2016

Dr Warranty expense $240

Cr Estimated warranty liability $240

Nov. 22, 2017

Dr Estimated warranty liability $209

Cr Repair parts inventory $209