Hitzu Co. sold a copier costing $5,500 with a two-year parts warranty to a customer on August 16, 2015, for $11,000 cash

Hitzu Co. sold a copier costing $5,500 with a two-year parts warranty to a customer on August 16, 2015, for $11,000 cash. Hitzu uses the perpetual inventory system. On November 22, 2016, the copier requires on-site repairs that are completed the same day. The repairs cost $126 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2016 for this copier. Based on experience, Hitzu expects to incur warranty costs equal to 4% 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 2015 for this copier?

Warranty expense
    $   440

2.	How much is the estimated warranty liability for this copier as of December 31, 2015?

Estimated warranty liability
  $  440

3.	How much warranty expense does the company report in 2016 for this copier?

Warranty expense
     $   0 

4.	How much is the estimated warranty liability for this copier as of December 31, 2016?

Estimated warranty liability
    $  314

5.	Prepare journal entries to record (a) the copier’s sale; (b) the adjustment on December 31, 2015, to recognize the warranty expense; and (c) the repairs that occur in November 2016.

Explanation:

1.

Warranty expense = 4% of dollar sales = 4% × $11,000 = $440.

2.

The December 31, 2015, balance of the liability equals the expense because no repairs are provided in 2015. Therefore, the ending balance of the Estimated Warranty Liability account is $440.

3.

The company should report no additional warranty expense in 2016 for this copier.

4.

The December 31, 2016, balance of the Estimated Warranty Liability account equals the 2016 beginning balance minus the costs incurred in 2016 to repair the copier:

Beginning 2016 balance	$	440
Less parts cost		(126)
Ending 2016 balance	$	314