Question

g Cupola Awning Corporation introduced a new line of commercial awnings in 2021 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were: Sales Actual Warranty Expenditures $5,800,000 $51,000 Required: 1. Does this situation represent a loss contingency? 2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2021. 3. What amount should Cupola report as a liability at December 31, 2021?

Answer 1

1. Does this situation represent a loss contingency?

since warranty liabilities are both probable and can be measured, yes, they are considered loss contingencies

2. Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any aspects of the warranty that should be recorded during 2021.

to record sales revenue

Dr Accounts receivable 5,800,000

Cr Sales revenue 5,800,000

to record warranty liability

Dr Warranty expense 174,000

Cr Warranty liability 174,000

warranty liability = $5,800,000 x 3%

to record actual warranty expenditures

Dr Warranty liability 51,000

Cr Cash/inventory/wages payable 51,000

3. What amount should Cupola report as a liability at December 31, 2021?

Warranty liability account's balance on December 31, 2021 = $174,000 - $51,000 = $123,000