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Why companies are required to estimate warranty expense

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Reference no: EM132950696

Alberni Computer Company sells computers for $2,000 each, which includes a one-year warranty that requires the company to perform periodic services and to replace defective parts. During 2020, Alberni sold 500 computers on account. Based on experience, the company has estimated the total one-year warranty costs at 5% of sales revenue.

At January 1st, 2020, the estimated liability for warranties was $33,000. In 2020, Alberni Computers spent $62,000 servicing the computers under warranty.

Required:

Problem 1. Prepare the journal entries for 2020.

Problem 2. What is the balance in the estimated liability for warranties account at December 31st, 2020?

Problem 3. Explain, conceptually, why companies are required to estimate and record warranty expense.

Reference no: EM132950696

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