Chapter 11, Problem 4BP

1.

To determine

Prepare journal entries to record these transactions and adjustments of Company L for 2015 and 2016.

Explanation of Solution

Warranty expense: Warranty expenses are those costs that a business expects to or has already incurred for the repair or replacement of its goods that it has sold.

Prepare journal entries to record these transactions and adjustments of Company L for 2015 and 2016.

Date	Account title and explanation	Post ref.	Debit ($)	Credit ($)
2015
November 16	Cash $\left(50\text{ grinders}\times \$50\right)$		2,500
	Sales			2,500
	(To record the sale of coffee grinders for cash.)
November 16	Cost of Goods Sold $\left(50\text{ grinders}\times \$24\right)$		1,200
	Merchandise Inventory			1,200
	(To Record the cost of goods sold on November 16)
November 30	Warranty Expense  $\left(\$2,500\times 10\%\right)$		250
	Estimated Warranty Liability			250
	(To record the coffee grinder warranty expense and the liability at 10% of selling price)
December 12	Estimated Warranty Liability $\left(6\text{ grinders}\times \$24\right)$		144
	Merchandise Inventory			144
	(To record the cost of warranty replacements)
December 18	Cash $\left(200\text{ grinders}\times \$50\right)$		10,000
	Sales			10,000
	(To record the sale of coffee grinders for cash)
December 18	Cost of Goods Sold $\left(200\text{ grinders}\times \$24\right)$		4,800
	Merchandise Inventory			4,800
	(To record the cost of goods sold on December 18)
December 28	Estimated Warranty Liability $\left(\text{17 grinders}\times \$24\right)$		408
	Merchandise Inventory			408
	(To record cost of coffee grinder returned under warranty replacements)
December 31	Warranty Expense $\left(\$10,000\times 10\%\right)$		1,000
	Estimated Warranty Liability			1,000
	(To record the coffee grinder warranty expense and the liability at 10% of selling price)
2016
January 07	Cash $\left(\text{40 grinders}\times \$50\right)$		2,000
	Sales			2,000
	(To record the sale of coffee grinders for cash)
January 07	Cost of Goods Sold $\left(\text{40 grinders}\times \$24\right)$		960
	Merchandise Inventory			960
	( To record the cost of goods sold on January 07 )
January 21	Estimated Warranty Liability  $\left(36\text{ grinders}\times \$24\right)$		864
	Merchandise Inventory			864
	(To record cost of coffee grinder warranty replacements.)
January 31	Warranty Expense		200
	Estimated Warranty Liability			200
	(To record the coffee grinder warranty expense and the liability at 10% of selling price)

Table (1)

2.

To determine

Determine the warranty expense that would be reported for November 2015 and for December 2015.

Explanation of Solution

Warranty expense: Warranty expenses are those costs that a business expects to or has already incurred for the repair or replacement of its goods that it has sold.

Compute the warranty expense that would be reported for November 2015 and for December 2015.

Warranty expense for November 2015 and December 2015
Particulars	Sales	Percent	Warranty Expense
November	$2,500	10%	$250
December	$10,000	10%	$1,000
Total	$12,500		$1,250

Table (2)

The warranty expense for November 2015 and December 2015 is $250 and $1,000 respectively.

3.

To determine

Compute the warranty expense that would be reported for January 2016.

Explanation of Solution

Warranty expense: Warranty expenses are those costs that a business expects to or has already incurred for the repair or replacement of its goods that it has sold.

Determine the warranty expense for January 2016.

Warranty expense for November 2016
Particulars	Amount
Sales in January	$2,000
Warranty percent	10%
Warranty expense	$200

Table (3)

The warranty expense for January 2016 is $200.

4.

To determine

Compute the balance of estimated warranty liability account as of December 31, 2015.

Explanation of Solution

Estimated liability: Estimated liability is an amount of debt or obligation which is valued at a later date, the amount of debt to be incurred is uncertain, but they are capable of being reasonably estimated.

Determine the balance of estimated warranty liability account as of December 31, 2015.

Balance of estimated liability as of December 31, 2015
Particulars	Amount
Warranty expense for November	$250
Warranty expense for December	$1,000
Less: Cost of replacing items in December $\left(23\text{ grinders}\times \$24\right)$	($552)
Estimated Warranty Liability balance as of December 2015	$698

Table (3)

The estimated warranty liability balance as of December 2015 is $698.

5.

To determine

Compute the balance of estimated warranty liability account as of January 31, 2016.

Explanation of Solution

Estimated liability: Estimated liability is an amount of debt or obligation which is valued at a later date, the amount of debt to be incurred is uncertain, but they are capable of being reasonably estimated.

Determine the balance of estimated warranty liability account as of January 31, 2016.

Balance of estimated liability as of January 31, 2016
Particulars	Amount
Beginning balance	$698
Warranty expense for January	$200
Less: Cost of replacing items in January $\left(36\text{ grinders}\times \$24\right)$	($864)
Estimated Warranty Liability balance as of December 2015	$34

Table (3)

The estimated warranty liability balance as of January 31, 2016is $34.