Hitzu Co. sold a copier costing $6,500 with a two-year parts warranty to a custo

ID: 2472263 • Letter: H

Question

Hitzu Co. sold a copier costing $6,500 with a two-year parts warranty to a customer on August 16, 2013, for $13,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2014, the copier requires on-site repairs that are completed the same day. The repairs cost $133 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2014 for this copier. Based on experience, Hitzu expects to incur warranty costs equal to 4% 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 2013 for this copier?

2.How much is the estimated warranty liability for this copier as of December 31, 2013?

3.How much warranty expense does the company report in 2014 for this copier?

4.How much is the estimated warranty liability for this copier as of December 31, 2014?

5a.Record the sales revenue of a copier for $13,000 cash with a two-year warranty that covers parts. The company records the related warranty expense as a year-end adjusting entry.

5a. Record the cost of goods sold of $6,500.

5b.Record the estimated warranty expense at 4% of the sales.

Explanation / Answer

Solution:

Working Note:

a) Warranty expense = 13,000 * 4% of dollar sales = 520

b) Estimated warranty liability for this copier as of December 31, 2014:

1) How much warranty expense does the company report in 2013 for this copier?

Warranty expense = 520

2) How much is the estimated warranty liability for this copier as of December 31, 2013?

Estimated warranty liability = 520

3) How much warranty expense does the company report in 2014 for this copier?

Warranty expense = 0

4) How much is the estimated warranty liability for this copier as of December 31, 2014?

Estimated warranty liability = 387

5) Journal Entries:

Beginning 2014 balance 520 Less parts cost 133 Ending 2014 balance 387

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Hitzu Co. sold a copier costing $6,500 with a two-year parts warranty to a custo

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Hitzu Co. sold a copier costing $6,500 with a two-year parts warranty to a custo

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