Question

Hitzu Co. sold a copier (that costs $6,500) for $13,000 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 $136 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)	$ 390.00	($ 13000 x 3%)
2)	$ 390.00	($ 13000 x 3%)
3)	$ 254.00	($ 390 - $ 136)

4)	Journal Entries
	Date	Particulars			Debit	Credit
	Year 1
	16-Aug	Cash			$ 13,000.00
		To Sales				$ 13,000.00
		Cost of Goods sold			$   6,500.00
		To Merchandise Inventory				$   6,500.00
	31-Dec	Warranty Expense			$      390.00
		To Estimated Warranty Liability				$      390.00
	Year 2
	5-Jan	Estimated Warranty Liability			$      136.00
		To Repair Parts Inventory				$      136.00