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Computer Wholesalers restores and resells notebook computers on eBay. It originally acquires the notebook computers from corporations upgrading their computer systems, and it backs each notebook it sells with a 90-day warranty against defects. Based on previous experience, Computer Wholesalers expects warranty costs to be approximately 4% of sales. By the end of the first year, sales and actual warranty expenditures are $490,000 and $17,500, respectively1. Does this situation represent a contingent liability? Yes No2. Record the necessary entries in Journal Entries3. What is the balance in the Warranty Liability account after the entries in Part 2?

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Answer:

1. Yes

2. Dr Warranty expense $19,600

Cr Warranty Liability $19,600

Dr Warranty Liability $17,500

Cr Cash $17,500

3. $2,100

Explanation:

1. Yes, based on the information given this situation represent a contingent liability reason been that a contingent liability is tend to be probable because the amount can be estimated.

2. Preparation to Record the necessary entries in Journal Entries

Dr Warranty expense $19,600 (490,000*4%)

Cr Warranty Liability $19,600

Dr Warranty Liability $17,500

Cr Cash $17,500

3. Calculation for the balance in the Warranty Liability account after the entries in Part 2

Balance in the Warranty Liability=$19,600-$17,500

Balance in the Warranty Liability=$2,100

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