Question

Hitzu Co. sold a copier (that costs $4,500) for $9,000 cash with a two-year parts warranty to a customer on August 16 of Year 1. Hitzu expects warranty costs to be 3% of dollar sales. It records warranty expense with an adjusting entry on December 31. On January 5 of Year 2, the copier requires on-site repairs that are completed the same day. The repairs cost $124 for materials taken from the repair parts inventory. These are the only repairs required in Year 2 for this copier.

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

2. How much is the estimated warranty liability for this copier as of December 31 of Year 1?

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

4. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment to recognize the warranty expense on December 31 of Year 1; and (c) the repairs that occur on January 5 of Year 2.

Answer 1

1) The Company will not report any warranty expense for thhe copier in Year -1

2) Estimated Warranty Liability as of December 31 of Year-1

=Total warranty Cost/2 Years

=9000*3%/2

=135

3) Estimated Warranty Liability as of December 31 of Year-2

=Total warranty Cost- Warranty liabilty of Year-1

=270-135

=135

4) Journal Entry

Date	Particulars	Debit	Credit
16-Aug	Cash A/c	9000
	To Sale A/c		9000
Year-1	Warranty Expense A/c	135
	To Estimated Warranty Liability		135
Year-2	Estimated Warranty Liability	124
	To Material A/c		124