Question

Hitzu Co. sold a copier (that costs $4,500) for $9,000 cash with a two-year parts warranty to a customer on August 16 of Year 1. Hitzu expects warranty costs to be 5% 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 $146 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?

Answer 1

In year 1 the warranty expense reported is $450 ($9,000 x 5%)

Step-by-step explanation:

The journal entries would be:

Sales journal entry - August 16 - Year 1

Account Debit Credit

Cash $9,000

Cost of goods sold $4,500

Revenue $9,000

Inventory $4,500

Accrued Warranty Expense - December 31 - Year 1

Account Debit Credit

Warranty Expense $450

Estimated Warranty

Liability $450

By the end of Year 1, the company has recognized an accrued expense (an accrued expense is recognized before cash is actually paid out) for $450.