Hitzu Co. sold a copier costing S6,500 with a two-year parts warranty to a custo

Question

Hitzu Co. sold a copier costing S6,500 with a two-year parts warranty to a customer on August 16, 2016, for $13,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2017, the copier requires on-site repairs that are completed the same day. The repairs cost $127 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2017 for this copier. Based on experience, Hitzu 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 1. How much warranty expense does the company report in 2016 for this copier? 2. How much is the estimated warranty liability for this copier as of December 31, 2016? liabilit 3. How much warranty expense does the company report in 2017 for this copier?

Explanation / Answer

Answer to Part 1.

Warranty Expense = 3% of Dollar Sales
Warranty Expense = $13,000 * 3%
Warranty Expense = $390

Answer to Part 2.

Estimated Warranty Liability is $390.

Answer to Part 3.

Warranty Expense to be reported in Company’s report in 2017 is $0.

Answer to Part 4.

Estimated Warranty Liability as of December 31, 2017 = $390 - $127
Estimated Warranty Liability as of December 31, 2017 = $263

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