ACCT 201 Principles of Financial Accounting Practice Exam - Chapter 9 Reporting & Analyzing Current Liabilities Dr. Fred Barbee Solution to Short-Problem #3

Short Problem #3

A company sells its product subject to a warranty that covers the cost of parts for repairs during the six months after the date of sale. Warranty costs are estimated to be 6% of sales. During the month of June, the company performed warranty work and used $12,000 worth of parts to do the warranty work. Sales for June amounted to $450,000.

a. Record the warranty expense for the month of June. Warranty Expense ($450,000 x .06) 27,000   Estimated warranty Liability   27,000

b. Record the costs ofthe warranty work completed in June. Estimated Warranty Liability 12,000   Parts Inventory   12,000

c. If the Estimated Warranty Liability account had a credit balance of $10,000 on May 31, what is the account balance at June 30? $10,000 + $27,000 - $12,000 + $25,000