Question

ABC Company sold 250 machines with a one year warranty contract. It is estimated that 6% of the machines will be defective with an average repair cost of $20 per machine. During the year, the company honored warranty contracts on 8 machines.

Use the above information to compute the below:

1) The number of estimated defective units is: *

a) 20 units

b) 25 units

c) 30 units

d) None of the above

2) The estimated warranty expense of the year is: *

a) $300

b) None of the above

c) $160

d) $250

3) The repair cost of the year is: *

a) $160

b) $250

c) $300

d) None of the above

4) The adjusting entry to accrue the estimated warranty costs should include: *

a) Debit Warranty Expense

b) Debit Warranty Liability

c) Credit Cash

d) Credit Repair Parts

5) The repair cost entry will include: *

a) Debit Warranty Expense

b) Debit Warranty Liability

c) Credit Cash

d) Debit Repair Parts

Answer 1

1. d) None of the above

Explanation: Estimated Defective Units = Number of Machines * Estimated Defective Rate

= 250 * 6%

= 15 units

2. a) $300

Explanation: Estimated Warranty Expense for the year = Estimated Defective Units * Average Repair Cost per unit

= 15 * 20

= $300

3. c) $160

Explanation: Repair Cost of the year = Number of Warranty contracts honoured * Average Repair Cost per unit

= 8 * 20

= $160

4. a) Debit Warranty Expense

Explanation: Journal Entry:

Warranty Expense (Dr.) $300

Warranty Liability (Cr.) $300

5. b) Debit Warranty Liability

Explanation: Journal Entry:

Warranty Liability (Dr.) $160

Repair Parts (Cr.) $160