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 6% of sales. Sales for the month of December are $410,000. Actual warranty expenditures in January of the following year were $13,500.
1. Does this situation represent a contingent liability?
Yes
No
1. Record the contingent liabilities for warranties.
4. What is the balance in the warranty liability account after the entries in Part 2 and 3?
Warranty liability _____

Answer 1

Answer:

The responses to these question can be defined as follows:

Explanation:

In question 1:

YES, the guarantee expense is an obligation.

In question 4:

                                    Journal entries:      

Date                      Title of Account                                  Dr               Cr

31-Dec                  expense Warranty $(460000\times4\%)$  18400  

                              Estimated liability Warranty                               18400

31-Jan                  Estimated liability Warranty   16000  

                                                      Cash                                                     16000

                                Balance on  Warranty Liability:    

Part -2  31-Dec Approximate amount of guarantee liability: $ 18400  

Part-3  31-Jan Approximate amount of guarantee liability: $ 2400