Lee Co. sold a copier costing $5,500 with a two-year parts warranty to a custome

Question

Lee Co. sold a copier costing $5,500 with a two-year parts warranty to a customer on August 16, 2009, for $11,000 cash. Lee uses the perpetual inventory system. On November 22, 2010, the copier requires on-site repairs that are completed the same day. The repairs cost $106 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2010 for this copier. Based on experience, Lee expects to incur warranty costs equal to 5% of dollar sales. It records warranty expense with an adjusting entry at the end of each year

How much warranty expense does the company report in 2009 for this copier?

How much is the estimated warranty liability for this copier as of December 31, 2009?

How much warranty expense does the company report in 2010 for this copier?

How much is the estimated warranty liability for this copier as of December 31, 2010?


Prepare journal entries to record the following:

the copier's sale

the adjustment on December 31, 2009, to recognize the warranty expense

the repairs that occur in November 2010

Explanation / Answer

WARRANTY COSTS: Product warranties are presumed to give rise to a probable liability that can be estimated. When goods are sold, an estimate of the amount of warranty costs to be incurred on the goods should be recorded as expense, with the offsetting credit to a Warranty Liability account. As warranty work is performed, the Warranty Liability is reduced and Cash (or other resources used) is credited. In this manner, the expense is recorded in the same period as the sale (matching principle). (1) the sale of copier, 16 Aug'09 Cash Dr 11,000 Sales Cr 11,000 16 AUg'09 Sales Dr 11,000 COGS Cr 5500 Profit Cr 400 Estimated Warranty Liability-Parts Cr 1100 2 Yrs Warraty @5% = 2*5%*1100 = $1100 How much warranty expense does the company report in 2009 for this copier? Ans: Warranty exp for 2009 is NIL How much is the estimated warranty liability for this copier as of December 31, 2009? Ans : Warranty period from16 AUg'09 to 31 Dec'09 Proportionat Wannty liability = 4.5 months = 4.5*$550/12 = $187.50 How much warranty expense does the company report in 2010 for this copier? Ans: $106 How much is the estimated warranty liability for this copier as of December 31, 2010? Ans : For YE 31 Dec'10, Warranty Liability = Liability for 2009 + Liability for 2010 = $187.50+$550 = $737.50 JE for the adjustment on December 31, 2009, to recognize the warranty expense Estimated Warranty Liability_Parts Dr $187.50 Warranty Expense - Parts Cr $187.50 JE for the repairs that occur in November 2010 Estimated Warranty Liability_Parts Dr $106 Warranty Expense - Parts Cr $106

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.