Question

In 2018, Cap City Inc introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 1% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. Sales were $5,200,000 for the first year of the product's life and actual warranty expenditures were $21,000. Assume that all sales are on credit. Required: 1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2018 2. What amount should Cap City report as a liability at December 31, 2018?

Answer 1

1
Accounts receivable	5200000
Sales revenue		5200000
(To record sales revenue)
Warranty expense	208000		=5200000*4%
Estimated warranty liability		208000
(To record warranty expense)
Estimated warranty liability	21000
Cash, parts, supplies, etc.		21000
(To record warranty payment)
2
Estimated liability	208000
Less: Actual Expenditures	-21000
Warranty liability at December 31, 2018	187000