The Washington Appliance Company sells a dealer a new washer for $5,000 on December 1,2013,with a maximum one-year warranty covering parts.Washington's experience shows that warranty expense averages about 5% of a washer's selling price.The company recorded the estimated expense and liability of $125 ($5,000 x 5%) related to this sale at the time of the sale.On March 18,2014,Washington sent a service person to the customer's home for warranty repairs.Parts costing $100 were replaced.How would the company record this transaction?

Question

Quizplus · Accepted Answer

When the service person visits the customer's home for warranty repair, the company should debit Estimated Warranty Liability and credit Washer Parts Inventory for the cost of the parts replaced during the repair. Since the parts cost $100, the company should record a debit to Estimated Warranty Liability for $100 and a credit to Washer Parts Inventory for $100. This transaction reduces the liability for estimated warranty expense and reduces the quantity of parts held in inventory.

The Washington Appliance Company Sells a Dealer a New Washer