Question

During August, Boxer Company sells $348,000 in merchandise that has a one year warranty. Experience shows that warranty expenses average about 5% of the selling price. The warranty liability account has a credit balance of $11,000 before adjustment. Customers returned merchandise for warranty repairs during the month that used $7,600 in parts for repairs. The entry to record the estimated warranty expense for the month is:

Answer 1

To calculate the monthly warranty expense, multiply the sales by the warranty expense percentage and factor in the existing warranty liability. For Boxer Company, this results in a $6,400 debit to Warranty Expense and a corresponding credit to Warranty Liability.

Step-by-step explanation:

Boxer Company needs to adjust its warranty liability account to reflect the expected costs of servicing warranties on the merchandise sold. Given that the company sold $348,000 worth of merchandise and anticipates that warranty expenses will average 5% of the selling price, we can calculate the warranty expense for the month. First, we multiply the total sales by the expected percentage of warranty costs: $348,000 * 5% = $17,400. Since there is already an $11,000 credit balance in the warranty liability account, the additional amount needed to cover the estimated expenses is $17,400 - $11,000 = $6,400. The entry to record the estimated warranty expense for the month would be a debit to Warranty Expense for $6,400 and a credit to Warranty Liability for $6,400. This adjustment takes into account the expected cost of future warranty claims on the merchandise sold during August.