Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The cars sold for an average of $9,500 each. The following activities occurred during 2017.
$$\begin{array} { | l | l | l | }
\hline \text { Feb } & 4 & \text { Sold five cars. } \
\hline \text { Mar } & 23 & \text { Sold ten cars. } \
\hline \text { May } & 20 & \text { Incurred warranty costs of \$6,000 an four cars sold in 2016. } \
\hline \text { July } & 6& \text { Sold eight cars. } \
\hline \text { Sep } & 1 & \text { Incurred warranty costs of \$5,000 on five cars sold in 2016. } \
\hline \text { Nov } & 14 & \text { Incurred warranty costs of \$4,000 on one car sold in 2016. } \
\hline \text { Dec } &2 2& \text { Sold twelve cars. } \
\hline
\end{array}$$
If Julia accrued its warranty liability with a single adjusting entry at year-end, the journal entry would include:
A)a debit to Warranty Liability for $28,700
B)a debit to Warranty Expense for $28,700
C)a credit to Parts for $17,220
D)a credit to Cash for $28,700

Question

Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The cars sold for an average of $9,500 each. The following activities occurred during 2017.
$$\begin{array} { | l | l | l | } 
\hline \text { Feb } & 4 & \text { Sold five cars. } \
\hline \text { Mar } & 23 & \text { Sold ten cars. } \
\hline \text { May } & 20 & \text { Incurred warranty costs of \$6,000 an four cars sold in 2016. } \
\hline \text { July } &  6& \text { Sold eight cars. } \
\hline \text { Sep } & 1 & \text { Incurred warranty costs of \$5,000 on five cars sold in 2016. } \
\hline \text { Nov } & 14 & \text { Incurred warranty costs of \$4,000 on one car sold in 2016. } \
\hline \text { Dec } &2 2& \text { Sold twelve cars. } \
\hline
\end{array}$$
If Julia accrued its warranty liability with a single adjusting entry at year-end, the journal entry would include:
A)a debit to Warranty Liability for $28,700
B)a debit to Warranty Expense for $28,700
C)a credit to Parts for $17,220
D)a credit to Cash for $28,700

Quizplus · Accepted Answer

To accrue the warranty liability, we need to record the estimated warranty cost for all the cars sold during the year. 
Number of cars sold during the year = 40 + 25 + 35 + 45 = 145 
Total estimated warranty cost = 145 × $820 = $118,900 
The adjusting entry would be: 
Warranty Expense $118,900 
Warranty Liability $118,900 
Option A is incorrect because it only shows the credit side of the entry. 
Option C is incorrect because there is no information provided about parts. 
Option D is incorrect because it only shows the debit side of the entry and does not account for the warranty liability.

Julia Used Cars Offers a One-Year Warranty from the Date