Victory Auto Sales, a used car dealership, offers a one-year or 29,000 mile warr

Question

Victory Auto Sales, a used car dealership, offers a one-year or 29,000 mile warranty covering parts on all vehicles it sells. The dealer's experience shows that warranty expense averages about 2% of a car's selling price. During July, Victory sold 8 cars for a total of $122,000. The entry to record the estimated expense and liability related to its July sales is:

debit Sales $305; credit Estimated Warranty Liability $305.

debit Warranty Expense $2,440; credit Estimated Warranty Liability $2,440.

debit Warranty Expense $2,440; credit Sales $2,440.

debit Sales Returns and Allowances $19,520; credit Parts Inventory $19,520.

debit Warranty Expense $305; credit Estimated Warranty Liability $305.

Explanation / Answer

Warranty liability estimated = 122000 * 2% = 2440

Journal entry:

Warranty Expense A/c Dr 2440

To Estimated Warranty liability A/c 2440

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