Question

Hitzu Co. sold a copier costing \(4,800 with a two-year parts warranty to a customer on August 16, 2017,for \)6,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2018, the copier requireson-site repairs that are completed the same day. The repairs cost $209 for materials taken from the repairparts inventory. These are the only repairs required in 2018 for this copier. Based on experience, Hitzuexpects to incur warranty costs equal to 4% of dollar sales. It records warranty expense with an adjustingentry at the end of each year.

1. How much warranty expense does the company report in 2017 for this copier?

2. How much is the estimated warranty liability for this copier as of December 31, 2017?

3. How much warranty expense does the company report in 2018 for this copier?

4. How much is the estimated warranty liability for this copier as of December 31, 2018?

5. Prepare journal entries to record (a) the copier’s sale; (b) the adjustment on December 31, 2017, torecognize the warranty expense; and (c) the repairs that occur in November 2018.

Short answer

1. The amount of the warranty is $240.
2. The estimated warranty liability is $240
3. The warranty expense of the company in 2018 is $209.
4. The estimated warranty liability is $31.
5. Journal entries

Step-by-step solution

Definition of warranty

A warrantyis a seller’s obligation to replace a good that doesn’t perform as expected within a specified period.In this, the cost that is incurred inthe repair of the item is borne by the seller of the product.

Warranty expense

The company recorders $240 as a warranty in 2017.

Estimated warranty liability

The estimated warranty liability in 2017 is 240.

Warranty expense in 2018

The company records $209 as a warranty expense.

Estimated warranty liability in 2018

$\begin{array}{c}\text{Estimated\hspace{0.17em}\hspace{0.17em}Warranty\hspace{0.17em}\hspace{0.17em}liability\hspace{0.17em}=\hspace{0.17em}\hspace{0.17em}Estimated\hspace{0.17em}\hspace{0.17em}liability\hspace{0.17em}of\hspace{0.17em}2017-\hspace{0.17em}Warrantyexpense}\\ \text{=\hspace{0.17em}\$240\hspace{0.17em}-\hspace{0.17em}\$209}\\ \text{=\$31}\end{array}$

Journal entries

Date	Particulars	Debit	Credit
August 16, 2017	Cash	$6,000
	Sales		$6,000
	(Being entry for the sale)
August 16, 2017	Cost of Goods Sold	$4,800
	Merchandise Inventory		$4,800
	(To record the cost of the goods sold)
December 31, 2017	Warranty Expense	$240
	Estimated Warranty Liability		$240
	(To record the estimated warranty liability)
November 22, 2018	Estimated Warranty Liability	$209
	Repairs Parts Inventory		$209
	(Entry for the repairs)