Lee Co. sold a copier costing $6,500 with a two-year parts warranty to a customer on August 16, 2009, for $9,400 cash. Lee uses the perpetual inventory system. On November 22, 2010, the copier requires on-site repairs that are completed the same day. The repairs cost $125 for materials taken from the Repair Parts Inventory. These are the only repairs required in 2010 for this copier. Based on experience, Lee expects to incur warranty costs equal to 3% of dollar sales. It records warranty expense with an adjusting entry at the end of each year.
1. How much warranty expense does the company report in 2009 for this copier?
2. How much is the estimated warranty liability for this copier as of December 31, 2009?
3. How much warranty expense does the company report in 2010 for this copier?
4. How much is the estimated warranty liability for this copier as of December 31, 2010?
5. Prepare journal entries to record.
(a) The copier’s sale.
(b) The adjustment on December 31, 2009, to recognize the warranty expense.
(c) The repairs that occur in November 2010.