Lee Co. sold a copier costing $6,500 with a two-year parts warranty to a custome

Question

Lee Co. sold a copier costing $6,500 with a two-year parts warranty to a customer on August 16, 2009, for $9,400 cash. Lee uses the perpetual inventory system. On November 22, 2010, the copier requires on-site repairs that are completed the same day. The repairs cost $125 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2010 for this copier. Based on experience, Lee expects to incur warranty costs equal to 3% of dollar sales. It records warranty expense with an adjusting entry at the end of each year.

Explanation / Answer

Journal Entries In the books of Lee co. $ $ Date Particulars Debit Credit 16-Aug-09 Cash Dr. 9400             To Sales 9400 (Being Sales Recorded) 16-Aug-09 Cost of Goods Sold Dr. 6500             To Inventory 6500 (Being inventory reduced to the extent goods sold) 31-Mar-10 Warranty Expense Account Dr. 282            To Warranty Liability Account 282 (Being warranty expense recorded @ 3% of Sales) 22-Nov-10 Warranty Liability Account Dr. 125             To Inventory 125 (Being spare parts inventory reduced & liability adjusted) Note: Since warranty is continuing upto August 2011, so liability will have to be maintained till August 2011

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