Jumbo Sales offers warranties on all their electronic goods. Warranty expense is estimated at 3% of sales revenue. In 2013, Jumbo had $595,000 of sales. In the same year, Jumbo paid out $8,500 of warranty payments. Which of the following is the entry needed to record the estimated warranty expense?

Question

Quizplus · Accepted Answer

The estimated warranty expense is calculated as 3% of sales revenue, which comes out to be $17,850 (3% of $595,000). This amount needs to be recorded as a liability on the balance sheet and as an expense on the income statement.
The entry for the estimated warranty expense would be:
Debit: Warranty Expense $17,850
Credit: Estimated Warranty Liability $17,850
Option C is the only entry that contains these accounts in the correct order with their respective amounts.

Jumbo Sales Offers Warranties on All Their Electronic Goods