Question

During June, Vixen Company sells $850,000 in merchandise that has a one year warranty. Experience shows that warranty expenses average about 3% of the selling price. Customers returned $14,000 of merchandise for warranty replacement during the month. The entry to record the estimated warranty provision at the end of the month is:

A) Debit Warranty Expense $11,500; credit Estimated Warranty Liability $11,500.
B) Debit Warranty Expense $14,000; credit Estimated Warranty Liability $14,000.
C) Debit Warranty Expense $25,500; credit Estimated Warranty Liability $25,500.
D) Debit Estimated Warranty Liability $14,000; credit Warranty Expense $14,000.
E) Debit Estimated Warranty Liability $11,500; credit Warranty Expense $11,500.

Answer 1

C) Debit Warranty Expense $25,500; credit Estimated Warranty Liability $25,500.

Step-by-step explanation:

Warranty expense is the cost that business expects to incur or has already spent for the goods sold and correspondingly provision is recognized on liability side. The Warranty estimates comes out to be $25,500 (i.e. 3% of the $850,000). The Vixen company will recognize as estimate of $25,500 as Warranty Expense and corresponding amount as an estimate of Warranty Liability.