Question

Hitzu Co. sold a copier (that costs $5,500) for $11,000 cash with a two-year parts warranty to a customer on August 16 of Year 1. Hitzu expects warranty costs to be 4% 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 $130 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?
2. How much is the estimated warranty liability for this copier as of December 31 of Year 1?
3. How much is the estimated warranty liability for this copier as of December 31 of Year 2?
4. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment to recognize the warranty expense on December 31 of Year 1; and (c) the repairs that occur on January 5 of Year 2.

Answer 1

Answer 1. Warranty expense to be recognized is ($11,000*0.04)=$440

Answer 2. Warranty liability at end of year one is $440

Answer 3. Warranty liability at the end of year two is ($440-$130)=$310

Answer 4.

Cash $11,000

To sales $11,000

(sale of copier recorded)

Warranty expense $440

To Warranty liability $440

(Warranty recorded at the end of year 1)

Warranty liability $130

To inventory $130

(Repairs done to copier)