Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2021 that carry a two-year warranty against manufacturer’s defects. Based on their experience with previous product introductions, warranty costs are expected to approximate 2% of sales. Sales and actual warranty expenditures for the first year of selling the product were:

Sales	Actual Warranty Expenditures
$5,510,000	$60,000

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 2021.
3. What amount should Cupola report as a liability at December 31, 2021?

Answer 1

Answer
1
Yes, this situation represent a loss contingency
The amount is probable and can be resonably estimated.
2
General Journal	Debit	Credit
Accounts receivable	$      5,510,000
Sales revenue		$      5,510,000
Warranty expense	$         110,200		5510000*2%
Estimated warranty liability		$         110,200
Estimated warranty liability	$           60,000
Cash, wages payable, parts and supplies, etc.		$           60,000
3
Warranty Liability at December 31, 2021	$           50,200		110200-60000