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

Question

Hitzu Co. sold a copier costing $5,500 with a two-year parts warranty to a customer on August 16, 2016, for $11,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2017, the copier requires on-site repairs that are completed the same day. The repairs cost $131 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2017 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 2016 for this copier?

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

3. How much warranty expense does the company report in 2017 for this copier?

4. How much is the estimated warranty liability for this copier as of December 31, 2017?

5. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment on December 31, 2016, to recognize the warranty expense; and (c) the repairs that occur in November 2017.

Explanation / Answer

1 Warranty expense =11000*4%=$440 2 Estimated warranty liability =$440 3 Warranty expense =$0 4 Estimated warranty liability =440-131=$309 5 Date General Journal Debit Credit Aug. 16, 2016 Cash 11,000 Sales 11,000 Aug. 16, 2016 Cost of goods sold 4,800 Merchandise inventory 4,800 31-Dec-16 Warranty expense 440 Estimated warranty liability 440 Nov. 22, 2017 Estimated warranty liability 131 Repair parts inventory 131

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