Question

Computer Wholesalers restores and resells notebook computers. It originally acquires the notebook computers from corporations upgrading their computer systems, and it backs each notebook it sells with a 90-day warranty against defects. Based on previous experience, Computer Wholesalers expects warranty costs to be approximately 5% of sales. Sales for the month of December are $450,000. Actual warranty expenditures in January of the following year were $15,500

1. Does this situation represent a contingent liability?

Yes

No

1. Record the contingent liabilities for warranties.

Answer 1

Answer:

1. Yes

THE MONTH OF DECEMBER

Dr    Warranty Expenses   $22,500

CR   Warranty Liability      $22,500

Being provision for warranty

THE MONTH OF JANUARY

Dr    Warranty Liability   $15,500

CR   Cash                       $15,500

Being warranty expenses incurred

Explanation:

In line with accrual principle and matching concept, the provision made for the current year is debited or charged to profit and loss or expense account for warranty, while the corresponding credit entry goes to provision for warranty account representing liability for warranty.

The actual payment in respect of warranty is debited to provision made for that purpose, and credited to cash or bank.

The provision for warranty = 5% of Sales

                                            =  5% x $450,000

                                            =  $22,500

                                            =