MGAB01H3 Lecture : Estimated Liabilities

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10 Nov 2010

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MGAB01H3 Full Course Notes

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These are obligations that exists but whose amount and timing are uncertain. However, the uncertainty is not so great that the company cannot reasonably estimate the liability. Until the bill is received for property taxes, it must be estimated and accrued. Once the bill is received, the annual expense must be adjusted for the portion already accrued. The estimated cost of honouring product warranty contracts should be recognized as an expense in the period in which the sale occurs. The estimated amount should be debited to warranty expense, with a credit to warranty liability. The entry to record the repair costs would be a debit to warranty liability and a credit to repair parts inventory. A contingency exists when there is uncertainty about the outcome. Although contingent receivables exist, contingent liabilities are far more common. An example would be the outcome of a lawsuit. If the lawsuit is lost, there will be liabilities to pay.

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Hitzu Co. sold a copier costing $4,500 with a two-year parts warranty to a customer on August 16, 2015, for $9,000 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 $131 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?

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

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

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

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.

5a. Record the sale of a copier for $9,000 cash.

5b. Record the cost of goods sold of $4,500.

5c. Record the sale of a copier for $9,000 cash. Record the cost of goods sold of $4,500. Record the estimated warranty expense at 4% of the sales.

5d. Record the cost of $131 towards the repair of the copier on November 22, 2016.

amaranthcrow841

[The following information applies to the questionsdisplayed below.]

On October 29, 2014, Lobo Co. began operations by purchasingrazors for resale. Lobo uses the perpetual inventory method. Therazors have a 90-day warranty that requires the company to replaceany nonworking razor. When a razor is returned, the companydiscards it and mails a new one from Merchandise Inventory to thecustomer. The company's cost per new razor is $14 and its retailselling price is $80 in both 2014 and 2015. The manufacturer hasadvised the company to expect warranty costs to equal 6% of dollarsales. The following transactions and events occurred.

2014

Nov.	11	Sold 80 razorsfor $6,400 cash.
	30	Recognizedwarranty expense related to November sales with an adjustingentry.
Dec.	9	Replaced 16razors that were returned under the warranty.
	16	Sold 240 razorsfor $19,200 cash.
	29	Replaced 32razors that were returned under the warranty.
	31	Recognizedwarranty expense related to December sales with an adjustingentry.

2015

Jan.	5	Sold 160 razorsfor $12,800 cash.
	17	Replaced 37razors that were returned under the warranty.
	31	Recognizedwarranty expense related to January sales with an adjustingentry.

1a. Prepare journal entries to record these transactions andadjustments for 2014.

1b. Prepare journal entries to record these transactions andadjustments for 2015.

2. How much warranty expense is reported for November 2014 andfor December 2014?


Warranty expense for November 2014
Warranty expense for December 2014

3. How much warranty expense is reported for January 2015?

Warranty expense

4. What is the balance of the Estimated Warranty Liabilityaccount as of December 31, 2014?

Estimated warranty liabilitybalance

5. What is the balance of the Estimated Warranty Liabilityaccount as of January 31, 2015?

Estimated warranty liabilitybalance

ambergoat258

Mason Auto Repair specializes in the repair of foreign cartransmissions. To encourage business, Mason offers a 6-monthwarranty on all repairs. The following data are available for2019:

Transmissions repaired, 2019	3,600
Expected frequency of warranty claims	0.03	per repair
Actual warranty claims, 2019	$39,000
Estimated warranty liability, 1/1/19	$31,100
Estimated cost of each warranty claim	$330

Assume that warranty claims are paid in cash.

Required:

1. Compute the warranty expense for 2019.
$

2. Prepare the entry to record the payment ofthe 2019 warranty claims.



	(Record payment of claims)

3. Conceptual Connection: What is the December31, 2019, balance in the estimated warranty liabilityaccount?
$

Why has the balance in the estimated warranty liability accountchanged from January 1, 2019?

The balance has because more claimswere than were through warranty expense.

ultramarinefox251

MGAB01H3 Lecture : Estimated Liabilities

MGAB01H3 Full Course Notes

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