Accounting for Warranty Expenses: A Guide to Recognizing Costs
How can a company like Momo Inc. recognize warranty expenses for the month?
a. Dr. Warranty Expense $3,150 Cr. Warranty Payable $3,150
b. Dr. Warranty Expense $840 Cr. Warranty Payable $840
c. Dr. Warranty Payable $840 Cr. Cash $840
d. Dr. Warranty Payable $3,150 Cr. Cash $3,150
To recognize Momo Inc.'s warranty expense for the month, the correct journal entry is a debit to Warranty Expense and a credit to Warranty Payable for the calculated expected warranty cost of $840.The question relates to accounting for warranty expenses in financial statements. Momo Inc. sold 200 units at $225 each and offers a 6-month warranty on these units. The cost to repair a unit under warranty is estimated to be $60, and past experience suggests that 7% of the units will need repairs. To recognize the warranty expense, we need to calculate the expected warranty cost for the units sold during the month.
We calculate the expected number of repairs as 200 units × 7% = 14 units. The estimated warranty expense is then 14 units × $60 per unit = $840. The correct journal entry to record the warranty expense would be to debit Warranty Expense for $840 and credit Warranty Payable for $840, reflecting the estimated liability for future warranty repairs.
The correct answer is:
Dr. Warranty Expense $840
Cr. Warranty Payable $840