Computer Wholesalers restores and resells notebook computers. 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. Sales for the month of December are $400,000. Actual warranty expenditures in January of the following year were $13,000. Required: 1. Does this situation represent a contingent liability? Why or why not?2. Record warranty expenditures and warranty liability for the month of December based on 6% of sales.3. Record the payment of the actual warranty expenditures of $13,000 in January of the following year. 4. What is the balance in the Warranty Liability account after the entries in Requirements 2 and 3?

1. Yes, because it is probable and can be reasonably estimated.

2.  Debit Warranty Expense for $24,000; and Credit Warranty Liability for $24,000.  

3. Debit Warranty Liability for $13,000; and Credit Cash for $13,000.

4. Balance in the Warranty Liability account = $11,000

Explanation:

1. Does this situation represent a contingent liability? Why or why not?

Yes, this situation represent a contingent liability.

This is because a contingent liability can be described as a liability that is probable with an amount that can be reasonably estimated.

2. Record warranty expenditures and warranty liability for the month of December based on 6% of sales.

Warranty expense = Sales for the month of December * Expected warranty costs as a percentage of sales = $400,000 * 6% = $24,000

Therefore, the journal entries will look as follows:

Date                 General Journal                        Debit ($)           Credit ($)  

Dec. Year 1      Warranty Expense                      24,000

                        Warranty Liability                                                  24,000

                         (To record warranty expenditures and liability.)                 

3. Record the payment of the actual warranty expenditures of $13,000 in January of the following year.

The journal entries will look as follows:

Date                General Journal                        Debit ($)             Credit ($)     

Jan. Year 2      Warranty Liability                       13,000

                        Cash                                                                         13,000

                        (To record actual warranty expenditures.)                               

4. What is the balance in the Warranty Liability account after the entries in Requirements 2 and 3?

Balance in the Warranty Liability account = Warranty Liability - Cash paid = $24,000 - $13,000 = $11,000

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