During August, Boxer Company sells $353,000 in merchandise that has a one year w

Question

During August, Boxer Company sells $353,000 in merchandise that has a one year warranty. Experience shows that warranty expenses average about 4% of the selling price. The warranty liability account has a credit balance of $11,500 before adjustment. Customers returned merchandise for warranty repairs during the month that used $8,100 in parts for repairs. The entry to record the estimated warranty expense for the month is: Multiple Choice Debit Warranty Expense $10,720; credit Estimated Warranty Liability $10,720. Debit Estimated Warranty Liability $14,120; credit Warranty Expense $14,120. Debit Estimated Warranty Liability $8,100; credit Warranty Expense $8,100. Debit Warranty Expense $2,620; credit Estimated Warranty Liability $2,620.

Explanation / Answer

Option 1 is correct.

It should be noted that Boxer Company expects to incur a warranty expenses of 4% on sales made of $353,000. In Total, Warranty liability for this year should stand at the end of year as $14,120 ($353,000 * 4%).

Company has created similar liability last year too for $11,500 out of which $8,100 is used in parts for repair which means the existing balance in Warranty liability account is $3,400 ($11,500 - $8,100).

Since the liability account already have $3,400 and there will be no liability in future on account of previous sales since the product has one year manufacturing warranty. Company need to create an extra liability of $10,720 to take the liability account balance as $14,120.

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