Cupola Awning Corporation introduced a new line of commercial awnings in 2016 th

Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2016 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 $5,560,000 Actual Warranty Expenditures $59,250 Required 1. Does this situation represent a loss contingency? Yes 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 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) view transaction list view general journal Journal Entry Worksheet Record the 2016 sales. Event General Journal Debit Credit *Enter debits before credits

Explanation / Answer

1) Answer: No

Expected warranty expense = 3% of $5560000 = $166800

Actual Warranty = $59250

As the actual warranty expense is less than the expected warranty expense, the situation does not indicate a loss situation for the company.

Second Part

Account Title and explanation Debit($) Credit($) 1) Accounts receivable 5560000 Sales 5560000 (Sales on account recorded) 2) Warranty Expense 166800 Accrued warranty liability 166800 (warranty liabilty created for expected waaranty expense @ 3% of sales) 3) Accrued warranty liabilty 59250 Cash 59250 (actual warranty expense charged against the provision for warranty)

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