Question

Amazon sells copiers that come with a 2-year warranty contract that requires them to fix any defects during the warranty period. During 2018, Amazon sells 600 copiers for $4,000 each. During 2018, Amazon spent $30,000 servicing these warranties. During 2019, Amazon spent $100,000 servicing these warranties.

a) Record any necessary journal entries related to the sale of the copiers and the warranties for both 2018 and 2019. Amazon estimates that the total cost of the 2-year warranties will be $150,000.

b) How would the liability related to these warranties be presented on the 2018 balance sheet?

Answer 1

Solution:

Part a – Journal Entries

Date	General Journal	Debit	Credit
Year 2018	Accounts Receivable	$2,400,000
	Sales Revenue (600 Copier*$4,000 each)		$2,400,000
	(To record sales for year 2018)
Year 2018	Warranty Expenses	$150,000
	Estimated Warranty Liability		$150,000
	(To record estimated warranty liability for 2 years)
Year 2018	Estimated Warranty Liability	$30,000
	To Cash		$30,000
	(To record the actual servicing cost for warranties for year 2018)
Year 2019	Estimated Warranty Liability	$100,000
	To Cash		$100,000
	(To record the actual servicing cost for warranties for year 2019)

Note: T-Account

Estimated Warranty Liability (Year 2018)
		Beginning Balance	$0
2018 Servicing Expense	$30,000	2018 Sales (Estimated total cost of 2 Year warranties)	$150,000
Ending Balance (Balancing figure)	$120,000
	$150,000		$150,000
Estimated Warranty Liability (Year 2019)
2019 Servicing Expense	$100,000	Beginning Balance	$120,000
Ending Balance (Balancing figure)	$20,000
	$120,000		$120,000

Part b – Presentation of Balance Sheet Year 2018

A warranty is a contingent liability. At the time of sale the associated warranty expenses is recorded and the related warranty liability accounts is recorded as liability.

Initially the liability increases the balance sheet liability account and when the company charges actual warranty costs this liability account decreases.

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