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 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 $115 for materials taken from the repair parts inventory. These are the only repairs required in Year 2 for this copier.

Required:
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?

Answer 1

1) Warranty expense = $550

2) Warranty liability = $550

3) Warranty liability = $435

Step-by-step explanation:

As per the data given in the question,

1.) Warranty expense = 5% of dollar sales

= 5% × $11,000

= $550

2.) On year end Dec-31st balance of liability will be same as expense incurred as there is no repair in year 1.

So, Estimated Warranty liability = Warranty expense

Estimated Warranty liability = $550

3.) Beginning balance = $550

Repair cost = $115

End balance of year = Beginning balance - Repair cost

= $550 - $115

warranty liability = $435