'No Rust' car sales provides a one-year labour and parts warranty with every car sold. It is expected that 1000 cars will be sold for the year. Past records show that about 8% of cars require warranty repairs at an average cost of $200 per car. What is the accounting entry to record the expected warranty expense for the year?

Question

Quizplus · Accepted Answer

The correct accounting entry to record the expected warranty expense is to debit warranty expense and credit provision for warranties for the estimated amount of $16,000 (1000 cars * 8% probability of repairs * $200 average cost per repair). This entry recognizes the expected cost of warranty repairs as an expense in the current period, in accordance with the matching principle.

'No Rust' Car Sales Provides a One-Year Labour and Parts