Answer:
1. Yes, because it is probable and can be reasonably estimated.
2. Debit Warranty Expense for $24,000; and Credit Warranty Liability for $24,000.
3. Debit Warranty Liability for $13,000; and Credit Cash for $13,000.
4. Balance in the Warranty Liability account = $11,000
Step-by-step explanation:
1. Does this situation represent a contingent liability? Why or why not?
Yes, this situation represent a contingent liability.
This is because a contingent liability can be described as a liability that is probable with an amount that can be reasonably estimated.
2. Record warranty expenditures and warranty liability for the month of December based on 6% of sales.
Warranty expense = Sales for the month of December * Expected warranty costs as a percentage of sales = $400,000 * 6% = $24,000
Therefore, the journal entries will look as follows:
Date General Journal Debit ($) Credit ($)
Dec. Year 1 Warranty Expense 24,000
Warranty Liability 24,000
(To record warranty expenditures and liability.)
3. Record the payment of the actual warranty expenditures of $13,000 in January of the following year.
The journal entries will look as follows:
Date General Journal Debit ($) Credit ($)
Jan. Year 2 Warranty Liability 13,000
Cash 13,000
(To record actual warranty expenditures.)
4. What is the balance in the Warranty Liability account after the entries in Requirements 2 and 3?
Balance in the Warranty Liability account = Warranty Liability - Cash paid = $24,000 - $13,000 = $11,000