Uncle Bob's Car Sales provides a one-year labour and parts warranty with every car sold. It is expected that 1500 cars will be sold during the year. Past records show that about 6% of cars require warranty repairs at an average cost of $300 per car. What is the accounting entry to record the expected warranty expense for the year?

Question

Quizplus · Accepted Answer

The accounting entry to record the expected warranty expense for the year is to debit Warranty Expense and credit Provision for warranties. This is because the warranty repairs are expected to cost $27,000 (1500 cars x 6% x $300), and the provision for warranties is created to account for the future expenses relating to warranty repairs. Therefore, option B is the correct choice. Option A is incorrect because it credits Bank, which does not relate to the warranty expense. Option C is incorrect because it debits Provision for warranties, which is already established and does not need to be debited again. Option D is incorrect because an entry is indeed required to record the expected warranty expense for the year.

Uncle Bob's Car Sales Provides a One-Year Labour and Parts