Hitzu Co. sold a copier costing $4,500 with a two-year parts warranty to a custo

Question

Hitzu Co. sold a copier costing $4,500 with a two-year parts warranty to a customer on August 16, 2015, for $9,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2016, the copier requires on-site repairs that are completed the same day. The repairs cost $146 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2016 for this copier. Based on experience, Hitzu expects to incur warranty costs equal to 3% of dollar sales. It records warranty expense with an adjusting entry at the end of each year.

1. How much warranty expense does the company report in 2015 for this copier?

2. How much is the estimated warranty liability for this copier as of December 31, 2015?

3. How much warranty expense does the company report in 2016 for this copier?

4. How much is the estimated warranty liability for this copier as of December 31, 2016?

5. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment on December 31, 2015, to recognize the warranty expense; and (c) the repairs that occur in November 2016.

Explanation / Answer

Solution :

1) Warranty expense the company report in 2015 for this copier is $ 0 because the company has not incurred any warranty expense in the year 2015 .

2) The estimated warranty liability for this copier as of December 31, 2015 = 3% of dollar sales.

Estimated warranty liability as of December 31, 2015 = $ 270 ( 0.03 X $9,000 )

3) The warranty expense the company reports in 2016 for this copier = $ 146

4) The estimated warranty liability for this copier as of December 31, 2016 = $ 124 ( Accrured warranty liability)

5)

Serial No Particulars Date Debit Credit 1 Accounts Receivable 16-Aug-15 $9,000 2 Sales Revenue 16-Aug-15 $9,000 3 Warranty Expense 31-Dec-15 $270 4 Accrured warranty liability 31-Dec-15 $270 5 Warranty Expense 22-Nov-16 $146 6 Cash paid for repairs materials 22-Nov-16 $146 7 Warranty Expense 31-Dec-16 $124 8 Accrured warranty liability 31-Dec-16 $124

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