In 2016, Cap City Inc. introduced a new line of televisions that carry a two-yea

Question

In 2016, Cap City Inc. introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 2% of sales during the first year of the warranty and approximately an additional 4% of sales during the second year of the warranty. Sales were $7,000,000 for the first year of the product's life and actual warranty expenditures were $39,000. Assume that all sales are on credit.

Prepare journal entries to summarize the sales and any aspects of the warranty for 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Required: 1.

Prepare journal entries to summarize the sales and any aspects of the warranty for 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Cap City Inc.

Journal entries:

Account Titles Debit Credit $ $ Accounts receivable 7,000,000 Sales 7,000,000 To record sales on account Product warranty expense 140,000 Estimated warranty liability 140,000 To record estimated product warranty expense and liability Estimated warranty liability 39,000 Cash / Merchandise Inventory 39,000 To record actual warranty costs, or replacement of parts

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