Talk Unlimited began business on January 1,2003.The company manufactures and sells cell phones cases.The company provides a warranty on its units,whereby the company will replace any defective case for two years after the sale,at no additional cost to the customer.During 2003,Talk Unlimited had sales of $850,000.The company estimates that the cost of the warranties will be 2% of sales.No warranty claims were made in 2003.During 2004,warranty claims of $15,700 were made.All warranty claims were satisfied and paid for.What journal entry,if any,is necessary for 2004 by Talk Unlimited?
A)No journal entry is necessary.

B) $\begin{array} { l l l }
\text { Liability for Warranties } & 15,700 & \
\text { Inventory } & & 15,700 \
\end{array}$

C)$\begin{array}{lccc}
\text { Prepaid Warranties } & 15,700 & \
\text { Inventory } & & 15,700 \
\end{array}$

D)$\begin{array}{lccc}
\text { Warranty Expense } & 15,700 & \
\quad \text { Inventory } & & 15,700 \
\end{array}$

E) $\begin{array}{lccc}
\text { Unearned Warranties } & 15,700 & \
\quad \text { Inventory } & & 15,700
\end{array}$

Question

Talk Unlimited began business on January 1,2003.The company manufactures and sells cell phones cases.The company provides a warranty on its units,whereby the company will replace any defective case for two years after the sale,at no additional cost to the customer.During 2003,Talk Unlimited had sales of $850,000.The company estimates that the cost of the warranties will be 2% of sales.No warranty claims were made in 2003.During 2004,warranty claims of $15,700 were made.All warranty claims were satisfied and paid for.What journal entry,if any,is necessary for 2004 by Talk Unlimited?
A)No journal entry is necessary.

B) $\begin{array} { l l l } 
\text {  Liability for Warranties } & 15,700 & \
\text { Inventory } & & 15,700 \
\end{array}$

C)$\begin{array}{lccc}
\text {  Prepaid Warranties } & 15,700 & \
\text { Inventory } & & 15,700 \
\end{array}$

D)$\begin{array}{lccc}
\text { Warranty Expense } & 15,700 & \
\quad \text { Inventory } & & 15,700 \
\end{array}$

E) $\begin{array}{lccc}
\text { Unearned Warranties } & 15,700 & \
\quad \text { Inventory } & & 15,700
\end{array}$

Quizplus · Accepted Answer

The warranty liability was established in 2003 when the sales were made. In 2004, when claims are made, the liability account is reduced, and inventory is credited to reflect the cost of replacing the defective items.

Talk Unlimited Began Business on January 1,2003 Liability for Warranties 15,700 Inventory 15,700\begin{array} { l l l } \text { Liability for Warranties } & 15,700 & \\\text { Inventory } & & 15,700 \\\end{array} Liability for Warranties Inventory ​15,700​15,700​

Talk Unlimited Began Business on January 1,2003 $\begin{array} { l l l } \text { Liability for Warranties } & 15,700 & \\\text { Inventory } & & 15,700 \\\end{array}$