Question

Hipster guarantees it’s snowmobiles for three years. Company experience indicates that warranty costs will be approx. 6% of sales. Assume that the Hipster dealer in Colorado Springs made sales toataling $800,000 during 2018. The company recieved cash for 30% of the sales notes Receivable for the remainder. Warranty payments totaled $32,000 during 2018.

Required:
1. Record the​ sales, warranty​ expense, and warranty payments for the company. Ignore cost of goods sold.
2. Assume the Estimated Warranty Payable is​ $0 on January​ 1, 2018. Post the 2018 transactions to the Estimated Warranty Payable​ T-account. At the end of 2018​, how much in Estimated Warranty Payable does the company​ owe?

Answer 1

Step-by-step explanation:

1. The journal entries are shown below:

Cash A/c Dr $240,000 ($800,000 × 30%)

Notes receivable ($800,000 × 70%)

To Sales revenue A/c $560,000

(Being the sales is recorded)

Warranty expense A/c Dr $36,000 ($600,000 × 6%)

To Inventory A/c $36,000

(Being the warranty expense is recorded)

Warranty payable A/c Dr $32,000

To Cash A/c $32,000

(Being the warranty payment is recorded)

2. The Estimated Warranty Payable​ T-account is presented below

Particulars Amount Particulars Amount

Warranty expense $36,000 Beginning balance $0

Cash $32,000

Ending balance $4,000