A company sells computers at a selling price of $1,800 each. Each computer has a

Question

A company sells computers at a selling price of $1,800 each. Each computer has a 2 year warranty that covers replacement of defective parts. It is estimated that 6% of all computers sold will be returned under the warranty at an average cost of $160 each. During November, the company sold 25,000 computers, and 400 computers were serviced under the warranty during November at a total cost of $61,000. The balance in the Estimated Warranty Liability account at November 1 was $39,000. What is the company's warranty expense for the month of November?

Explanation / Answer

When the estimated amount is recognised,

Dr Warranties expense (25,000 x 6% x $160) $240,000
Cr Estimated Warranty Liability $240,000

When the repairs are paid for,
Dr Estimated Warranty Liability $61,000
Cr Cash $61,000

The only entry hitting the expense account is the $240,000.

So the company's warranty expense for the month of November is $240,000.

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