Question

During August, Boxer Company sells $357,000 in merchandise that has a one year warranty. Experience shows that warranty expenses average about 4% of the selling price. The warranty liability account has a credit balance of $12,900 before adjustment. Customers returned merchandise for warranty repairs during the month that used $9,500 in parts for repairs. The entry to record the customer warranty repairs is:

Multiple Choice
A. Debit Warranty Expense $10,880; credit Estimated Warranty Liability $10,880.
B. Debit Estimated Warranty Liability $14.280 credit Parts Inventory $14,280.
C. Debit Warranty Expense $14.280: credit Estimated Warranty Liability $14.250
D. Debit Estimated Warranty Liability 59,500 credit Parts Inventory $9,500.

Answer 1

The entry to record the customer warranty repairs is "Debit Estimated Warranty Liability $9,500; credit Parts Inventory $9,500."

The entry to record customer warranty repairs involves debiting the "Estimated Warranty Liability" account and crediting the "Parts Inventory" account, both with amounts of $9,500. This accounting transaction reflects the recognition of the expenses associated with honoring warranty claims.

The "Estimated Warranty Liability" account is initially credited with a balance of $12,900 before adjustment. To determine the appropriate adjustment, the company considers its past experience which shows that warranty expenses average about 4% of the selling price.

In August, the company sold $357,000 worth of merchandise with a one-year warranty. Therefore, the estimated warranty liability for the month is calculated as 4% of $357,000 which equals $14,280.