Question

Hitzu Co. sold a copier costing $4,500 with a two-year parts warranty to a customer on August 16, 2015, for $9,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2016, the copier requires on-site repairs that are completed the same day. The repairs cost $131 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2016 for this copier. Based on experience, Hitzu expects to incur warranty costs equal to 4% of dollar sales. It records warranty expense with an adjusting entry at the end of each year.

1. How much warranty expense does the company report in 2015 for this copier?

2. How much is the estimated warranty liability for this copier as of December 31, 2015?

3. How much warranty expense does the company report in 2016 for this copier?

4. How much is the estimated warranty liability for this copier as of December 31, 2016?

Prepare journal entries to record (a) the copier’s sale; (b) the adjustment on December 31, 2015, to recognize the warranty expense; and (c) the repairs that occur in November 2016.

5a. Record the sale of a copier for $9,000 cash.

5b. Record the cost of goods sold of $4,500.

5c. Record the sale of a copier for $9,000 cash. Record the cost of goods sold of $4,500. Record the estimated warranty expense at 4% of the sales.

5d. Record the cost of $131 towards repair of copier on November 22, 2016.

Answer 1

1. How much warranty expense does the company report in 2015 for this copier?

• $360

2. How much is the estimated warranty liability for this copier as of December 31, 2015?

• $360

3. How much warranty expense does the company report in 2016 for this copier?

• $0

4. How much is the estimated warranty liability for this copier as of December 31, 2016?

• $229

5a. Record the sale of a copier for $9,000 cash.

Dr Cash 9,000

Cr Sales revenue 9,000

5b. Record the cost of goods sold of $4,500.

Dr Cost of goods sold 4,500

Cr Inventory - merchandise 4,500

5c. Record the estimated warranty expense at 4% of the sales.

Dr Warranty expense 360

Cr Warranty liability 360

5d. Record the cost of $131 towards repair of copier on November 22, 2016.

Dr Warranty liability 131

Cr Inventory - repair parts 131