Hitzu Co. sold a copier costing $3,500 with a two-year parts warranty to a custo

Question

Hitzu Co. sold a copier costing $3,500 with a two-year parts warranty to a customer on August 16, 2015, for $7,000 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 $124 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?

5. 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 $7,000 cash.

5b.Record the cost of goods sold of $3,500.

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

5d. Record the cost of $124 towards repair of copier on November 22, 2016.

Please show work...thank you.

Explanation / Answer

Sale done on August 2015 Cost of copier = 3500 Saleprice = 7000 Warrant exps =4% ofsale=4% of 7000 = 280 This expense is for 2 years Expense per year = 280/2 = 140 1. The company will report the expense from 16th August 2015 to 31st December 2015 whichis 4.5 months This is because the company is liable for warranty till the expiry of warranty period ie till 15th August 2017 hence value = 280/24 * 4.5 = 52.50 2.Estimated warranty liability for this copier as on 31st December 2015 = = Warranty liability = 280 This is because the liability stands till 15th August 2015 3. The company will report the actual expense of of $ 124 as warranty expense for the year 2016 for this copier 4. Warranty liability for December 31, 2016 is = Total Warranty estimated - Warranty expense actually incurred = 280 - 124 =156 5a) 16th August 2015 Cash Dr 7000      Sales A/c Cr 7000 ( To record the sale of copier for cash) 5b) 16th August 2015 Cost of goods sold Dr 3500     Purchases Cr 3500 ( To record the cost of goods sold ) 5c) 31st December 2015 Warranty Expense Dr 52.50 Prepaid Expense Dr 227.50      Warranty Liability Cr 280.00 ( To record the warranty expense for the year 2015) 5d) November 22,2016 Warranty Expense Dr 124     Material Inventory Cr 124 ( To record the cost of repairs )

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