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28 April, 09:21

Hitzu Co. sold a copier (that costs $7,500) for $15,000 cash with a two-year parts warranty to a customer on August 16 of Year 1. Hitzu expects warranty costs to be 5% of dollar sales. It records warranty expense with an adjusting entry on December 31. On January 5 of Year 2, the copier requires on-site repairs that are completed the same day. The repairs cost $124 for materials taken from the repair parts inventory. These are the only repairs required in Year 2 for this copier.

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  1. 28 April, 09:48
    0
    1. Warranty expense

    $ 750

    2. Estimated warranty liability

    $ 750

    3. Warranty Expense $ 0

    4.

    Estimated warranty liability

    $ 626

    5. Hitzu Co. Journal entries

    Aug 16

    Dr Cash 15,000

    Cr Sales 15,000

    Aug 16

    Dr Cost of goods sold 7500

    Cr Merchandise inventory 7500

    Dec 31

    Dr Warranty expense 750

    Cr Estimated Warranty liability 750

    Dec 31

    Dr Estimated warranty liability 124

    Cr Repair part inventory 124

    Explanation:

    1.

    Warranty expense 5% of dollar sales

    = 5% * $15,000 = $750.

    2.

    The December 31, 2017, balance of the liability equals the expense because no repairs are provided in 2017. Therefore, the ending balance of the Estimated Warranty Liability account is $750.

    3.

    The company should report no additional warranty expense in 2018 for this copier.

    4.

    The December 31, 2018, balance of the Estimated Warranty Liability account equals the 2016 beginning balance minus the costs incurred in 2018to repair the copier:

    Beginning 2016 balance $ 750

    Less parts cost (124)

    Ending 2018 balance $626
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