Question

Cupola Awning Corporation introduced a new line of commercial awnings in 2016 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?

	No
	Yes

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 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1 Record the 2016 sales.

2 Record the accrued liability and expense.

3 Record the actual expenditures.

3.	What amount should Cupola report as a liability at December 31, 2016?

	Liability

Answer 1

Q1.
Answer is True.
As the warranty expense may have to be incurred for total 2 years from the date of sale
Req 2:
Journal entries:
S.no.	Accounts title and explanations					Debit $	Credit $
1	Accounts receivable Account Dr.					5510000
	Sales revenue						5510000
2	Warranty Expense Aaccount Dr.					110200
	Warranty expense liability (5510000*2%)						110200
3	Warranty expense liability Dr.					60000
	Cash account						60000
Req 3:
Total estimated warranty liability created				110200
Less: Actual expense incurred				60000
Warranty expense liability shown in BS				50200