Question

Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 4% of sales. By the end of the first year, sales are $800,000. Actual warranty expenses incurred so far are $12,000.


1. Does this situation represent a contingent liability?

	Yes
	No

2. Record warranty expense and warranty liability for the year based on 4% of sales

3. Record the actual warranty expenditures of $12,000 incurred so far

4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?

Answer 1

Q1.
True.
Warranty liability is a contingent liability that is probable but this is capable of making a estiamte hence recorded in books.
Q2.
Journal Entry:
Warranty expense Account Dr.				32,000
Estimated Warranty Liability Account (800000*4%)					32000
Q3.
Journal Entry:
Estimated Warranty Liability Account Dr.				12000
Cash account					12000
Q4.
Balance in Estimated warranty Lliability:
Amount of liability created				32000
Less: Liability paid off during the year				12000
Balance in Estimated warranty Lliability:				20000