A company estimates that warranty expense will be 4% of sales. The company's sales for the current period are $185,000. The current period's entry to record the warranty expense is:
A) Debit Warranty Expense $7,400; credit Sales $7,400.
B) Debit Warranty Expense $7,400; credit Estimated Warranty Liability $7,400.
C) Debit Estimated Warranty Liability $7,400; credit Warranty Expense $7,400.
D) Debit Estimated Warranty Liability $7,400; credit Cash $7,400.
E) No entry is recorded until the items are returned for warranty repairs.

Question

Quizplus · Accepted Answer

According to the information provided, the company estimates warranty expense to be 4% of sales, which means that the warranty expense for the current period will be $185,000 x 4% = $7,400.

The entry to record this expense should be a debit to Warranty Expense for $7,400 and a credit to Estimated Warranty Liability for $7,400. This is because the company is estimating the amount it will need to pay out in warranty claims in the future. By recording the expense in Estimated Warranty Liability, the company is setting aside funds to cover any future claims that may arise.

A Company Estimates That Warranty Expense Will Be 4% of Sales