Holmes Company produces widgets that cost $120 each and have a 5 percent failure rate during the warranty period.If 500 widgets are sold,the entry to record the estimated product warranty expense would be
A) Product Warranty Expense 600
Estimated Product Warranty Liability 600
B) Product Warranty Expense 3,000
Estimated Product Warranty Liability 3,000
C) Product Warranty Expense 300
Cash 300
D) Estimated Product Warranty Liability 150
Cash 150

Question

Quizplus · Accepted Answer

The estimated product warranty expense can be calculated by multiplying the number of units sold (500) by the cost per unit ($120) and the failure rate (5% or 0.05). 
Estimated product warranty expense = 500 x $120 x 0.05 = $3,000. 
Therefore, the entry to record the estimated product warranty expense would be: 
Debit Product Warranty Expense $3,000 
Credit Estimated Product Warranty Liability $3,000.

Holmes Company Produces Widgets That Cost $120 Each and Have