On December 6, 2014, Norwood Co. sold a copier for cash of $12,000 (cost $9,400) with a two-year parts and labor warranty. Based on prior experience, Norwood expects eventually to incur warranty costs equal to 5% of the selling price. The fiscal year coincides with the calendar year. On January 20, 2015, the customer returned the copier for repairs that were completed the same day. The cost of the repairs consisted of $198 for the materials taken from the parts inventory and $360 of labor that was fully paid with cash. These were the only repairs required in 2015 for this copier.
1. How much warranty expense should the company report in 2014 for this copier?
2. How much is the warranty liability for this copier as of December 31, 2014?
3. How much warranty expense should the company report in 2015 for this copier?
4. How much is the warranty liability for this copier as of December 31, 2015?
5. Show the journal entries that would be made to record:
(a) The sale (assume a perpetual inventory system)
(b) The adjustment on December 31, 2014, to record the warranty expense
(c) The repairs that occurred in January 2015. Ignore sales taxes.