Question

Hitzu Co. sold a copier costing $7,500 with a two-year parts warranty to a customer on August 16, 2017, for $15,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2018, the copier requires on-site repairs that are completed the same day. The repairs cost $132 for materials taken from the repair parts inventory. These are the only repairs required in 2018 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.

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

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

3. How much warranty expense does the company report in 2018 for this copier?

4. How much is the estimated warranty liability for this copier as of December 31, 2018?

5. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment on December 31, 2017, to recognize the warranty expense; and (c) the repairs that occur in November 2018.

• 1

  Record the sale of a copier for $15,000 cash.

• 2

  Record the cost of goods sold of $7,500.

• 3

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

• 4

  Record the cost of $132 towards repair of copier on November 22, 2018.

Answer 1

1. Warranty expenses to be reported in 2017 for sale of copier is $750.
   Calculation

   Particular/Details	Amount
   Sale amount of copier	$ 15,000.00
   Expected warranty cost (5% of dollar sale) - 15000*5%	$       750.00

2. Estimated warranty liability for copier as of December 31, 2017 is $750.
   Calculation

   Particular/Details	Amount
   Sale amount of copier	$ 15,000.00
   Expected warranty liability (5% of dollar sale) - 15000*5%	$       750.00

3. Nil
4. Estimated warranty liability for copier as of December 31, 2018 is $618.
   Calculation

   Particular/Details	Amount
   Warranty liability as of December 31, 2017	$       750.00
   Repair cost incurred in 2018	$       132.00
   Warranty liability as of December 31, 2018 (750-132)	$       618.00

5. Journal entries

   No	Date	Particulars	Debit	Credit
   1	Aug 16, 2017	Cash	$ 15,000.00
   Sale		$ 15,000.00
   (sale of copier for $ 15,000)
   2	Aug 16, 2017	Cost of goods sold	$   7,500.00
   Inventory		$   7,500.00
   (Cost of goods sold is recognised)
   3	Dec 31, 2017	Warranty expense	$       750.00
   Warranty liability		$       750.00
   (Warranty liability created for 5% of revenue and the expense being recorded according to matching concept)
   4	Nov 22, 2018	Warranty liability	$       132.00
   Repair parts inventory		$       132.00
   (Repair parts inventory consumed and warranty liability reduced to the same extent)