Question

n 2021, Cap City Inc. introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 1% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. Sales were $6,000,000 for the first year of the product's life and actual payments for warranty expenditures were $29,000. Assume that all sales are on credit. Required: 1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2021. 2. What amount should Cap City report as a liability at December 31, 2021

Answer 1

A.

1.Dr Account receivable $6,000,000

Cr Sales $6,000,000

2. Dr warranty expenses $240,000

Cr Etimated warranty liability $240,000

3. Dr Estimated warranty liability $29,000

Cr Cash $29,000

B. $211,000

Step-by-step explanation:

A. Preparation of journal entries to summarize the sales and any aspects of the warranty for 2021

1.Dr Account receivable $6,000,000

Cr Sales $6,000,000

(To record sales on credit)

2. Dr warranty expenses $240,000

Cr Etimated warranty liability $240,000

[(Warranty costs 1%+ Additional 3%)×$6,000,000)

=4%×$6,000,000

=$240,000

( To record accrued warranty expenses for year 1)

3. Dr Estimated warranty liability $29,000

Cr Cash $29,000

(To record actual warrant expenses)

B.Calculation for the amount that Cap City should report as a liability at December 31, 2021

Etimated warranty liability $240,000

Less Actual expenditure $29,000

Balance December 31, 2021 $211,000

Therefore the amount that Cap City should report as a liability at December 31, 2021 will be $211,000