Cupola Awning Corporation introduced a new line of commercial awnings in 2018 th

Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2018 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 4% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Required:
1. Does this situation represent a loss contingency?

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 2018. (Record 2018 sales, record the accrued liability and expense, record the actual expenditures)

3. What amount should Cupola report as a liability at December 31, 2018?

Explanation / Answer

1) Yes Because there is an expected warranty costs 2) Account Head & Description Debit Amount Credit Amount Accounts receivable 5770000 Sales revenue 5770000 (to record sales revenue) Warranty expenses (5770000*4%) 230800 Estimated warranty liability 230800 (to record the accrued liability and expenses) Estimated warranty liability 59500 Cash, wages payable, parts and supplies, etc 59500 (to record the actual expenses) 3) Amount should Cupola report as a liability at December 31, 2018 = $230800-$59500 = $171300

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