The ABC Company sells laser printers. Each printer that is sold includes a 6-mon
ID: 2487560 • Letter: T
Question
The ABC Company sells laser printers. Each printer that is sold includes a 6-month warranty. Based on previous experience, ABC anticipates its warranty expenditure to be 2.5% of sales. By the end of the year total sales are $500,000. The actual warranty expenditures totaled $10,000.
a. Is this a contigent liability? Should it be recorded? Why or why not?
b. Record the warranty expense and warranty liability for the year based on past experience.
c. Record the reduction in the warranty liability and the reduction in cash of $10,000.
d. What is the balance in the Warranty Liability account after the previous entries if it has an opening balance of $2,000?
Explanation / Answer
A Warranty is a Contingent Liabilty as the actual expense is incurred on a contingency. It should be recorded as the company has expenditures of 2.5 % based on past experiences.
B Warrant Expense A/c Dr ................... 12500
To Warrant Liability .............................12500
C Warrant Liability A/c Dr.......................10000
To Bank A/c ......................................10000
D Balance in Warrant Liability a/c would be 2000 + 12500 - 10000 = 4500.00
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