Hiatt Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Hiatt estimates that 4% of the units sold will become defective during the warranty period. Management estimates that the average cost of replacing or repairing a defective unit is $16.The units sold and units defective that occurred during the last 2 months of 2010 are as follows.
Units Units Defective
Month Sold Prior to December 31
November 40,000 600
December 50,000 300
Instructions
(a) Determine the estimated warranty liability at December 31 for the units sold in November and December.
(b) Prepare the journal entries to record the estimated liability for warranties and the costs incurred in honoring 900 warranty claims. (Assume actual costs of $14,400.)
(c) Give the entry to record the honoring of 1,100 warranty contracts in January at an average cost of $16.