Question

Problem 8-79A (Algorith mic) Warranties Mason Auto Repair specializes in the repair foreign car transmissions. To encourage business, Mason offers a 6-month warranty on all repairs. The following data are available for 2019: Transmissions repaired, 2019 5,600 0.03 per repair Expected frequency of warranty claims $44,200 Actual warranty claims, 2019 Estimated warranty liability, 1/1/19 $35,200 Estimated cost of each warranty claim $240 Assume that warranty claims are paid cash. Required: 1. Compute the warranty expense for 2019. 2. Prepare the entry to record the payment of the 2019 warranty claims. (Record payment of claims) 3. Conceptual Connection: What is the December 31, 2019, balance in the estimated warranty liability account? $ Why has the balance in the estimated warranty liability account changed from January 1, 2019? than were The balance has because more claims were through warranty expense.

Answer 1

SOLUTION

1.

Particulars	Amount
Transmissions repaired, 2019 (A)	5,600
Expected frequency of warranty claims (B)	0.03 per pair
Expected Warranty claims (C=A*B)	168
Estimated cost of each warranty claim (D)	$240
Warranty expense for 2019 (C*D)	$40,320

2. Journal entry-

General journal	Debit ($)	Credit ($)
Warranty liability	44,200
Cash		44,200
(To record the payments)

3.

Particulars	Amount ($)
Balance on 1/1/19	35,200
Addition during the year	40,320
Less: Actual warranty claims paid in 2019	(44,200)
Balance on 31/12/2019	31,320