On march 17, Topi Corporation sells 1,000 cell phones for $299,000. The company

Question

On march 17, Topi Corporation sells 1,000 cell phones for $299,000. The company offers a warranty with the cell phones and estimates that 1% of the selling price will go to pay for warranty repairs. What journal entry should the company make on March 17 to estimate the warranty liability associated with the cell phones sold? What effect does this entry have on the accounting equation? Assets = Liabilities + Equity On April 4, one of the cell phones is brought in for a warranty repair that requires a $60 replacement. What journal entry should the company make on April 4 to record the warranty' repair? What effect does this entry have on the accounting equation? Assets = Liabilties + Equity

Explanation / Answer

Solution.

Journal entry on March 17

Cash Dr. 299,000

Sales Cr. 299,000

( To record sales )

Warranty Expense Dr. 2,990

Warranty Liability Cr. 2,990

( To record Warranty expense 1% of 2999,000 )

Effect on Accounting Equaiton.

Assets = Liabilities + Equity

Cash(299,000) = 0 + 299,000(Equity)

   0 = 2,990 - 2,990

299,000 = 2,990 + 296,010

Cash = 299,000

Liabbilty = 2,990

Equity = 296,010

Journal entry on 4 April

Estimated Warranty liability Dr. 60

Warranty Expense    Cr. 60

( To record $60 Warranty expense )

Accounting equation

Assets = Liabilities + Equity

Previous equation 299,000 = 2,990 + 296,010

On 4 April (60) = (60) + 0

New Equation 298,940 = 2,930 + 296,010

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