Hitzu Co. sold a copier costing $3,500 with a two-year parts warranty to a custo

Question

Hitzu Co. sold a copier costing $3,500 with a two-year parts warranty to a customer on August 16, 2015, for $7,000 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 $123 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 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 2015 for this copier? How much is the estimated warranty liability for this copier as of December 31, 2015? How much warranty expense does the company report in 2016 for this copier? How much is the estimated warranty liability for this copier as of December 31, 2016? 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

Dollar sales 7000 Warranty expense estimated 5% Total Warranty liability ( 2 years) 350 1) the entire amount of warranty liabilty will be recorded as an expense , because the costs related to a sale of the product is matched in the year the sale is recorded hence warranty expense in 2015 is $ 350 2) $ 350 as the entire liability is carried forward 3) No warranty expense is recorded in 2016 as the entire expense has been recorded in 2015 4) $ 227 ( 350 -123) 5) correct entries 31-Dec Warranty expense Dr 350                    Estimated Warranty liability Cr 350 22-Nov Estimated warranty liability Dr 123                Repair part inventory Cr 123

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