Question

On December 6, 2017, Norwood Co., an office equipment supplier, sold a copier for cash of $12,000 (cost $9,400) with a two-year parts and labour warranty. Based on prior experience, Norwood expects eventually to incur warranty costs equal to 5% of the selling price. The fiscal year coincides with the calendar year. On January 20, 2018, the customer returned the copier for repairs that were completed the same day. The cost of the repairs consisted of $198 for the materials taken from the parts inventory and $360 of labour that was fully paid with cash. These were the only repairs required in 2018 for this copier.

Required:
1. How much warranty expense should the company report in 2017 for this copier?

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

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

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

5. Show the journal entries that would be made to record (a) the sale (assume a perpetual inventory system); (b) the adjustment on December 31, 2017, to record the warranty expense; and (c) the repairs that occurred in January 2018. Ignore sales taxes.

Answer 1

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

12000 x 5% = $600

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

$600

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

$0

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

$600 – (198 + 360) = $42

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 January 2018.

Date	General Journal	Debit	Credit
Dec 6 2017	Cash	12000
	Sales		12000
Dec 6 2017	Cost of goods sold	9400
	Merchandise inventory		9400
Dec 31 2017	Warranty expense	600
	Estimated warranty liability		600
Jan 20 2018	Estimated warranty liability(198 + 360)	558
	Repair parts inventory		558