Question

On December 6, 2017, Norwood Co., an office equipment supplier, sold a copier for cash of $24,000 (cost $15,400) 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 $406 for the materials taken from the parts inventory and $556 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.

1

Record the cash sale of a copier.

2

Record the cost of the Dec. 6 sale.

3

Record the warranty expense for the copier sold in 2017.

4

Record the cost of warranty repairs.

Answer 1

Solution:
1.	Warranty expense = $1,200
Working Notes:
	Warranty expense for 2017 = Sale price of copier x % expected warranty cost
	= $24,000 x 5%
	= $1,200
2.	Estimated warranty liability = $1,200
Working Notes:
	Warranty liability is equal to the estimated warranty expense , since in 2017 there is no repair is done , hence there will be no reduction in warranty liability.
3.	Warranty expense for 2018 = 0
Working Notes:
	Since , company has already booked warranty expense in 2017 , hence no warranty expense will be book in 2018
4.	Estimated warranty liability for 2018 = $ 238
Working Notes:
	Warranty liability at beginning of 2018 = $1,200		(Which was booked in 2017)
Less:	Parts cost	$406
Less:	Labor cost	$556
Warranty liability as of December , 31, 2018		238
5.
1.
Date	General Journal	Debit	Credit
Dec 06 2017	Cash	24,000
	Sales		24,000
2.
Date	General Journal	Debit	Credit
Dec 06 2017	Cost of goods sold	15,400
	Merchandise inventory		15,400
3.
Date	General Journal	Debit	Credit
Dec 31 2017	Warranty expense	1,200
	Estimated warranty liability		1,200
4.
Date	General Journal	Debit	Credit
JAN 20 2018	Estimated warranty liability	962
	Repair parts inventory		406
	Repair labor		556
Please feel free to ask if anything about above solution in comment section of the question.