Questions: Swifty Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Swifty 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 25. The units sold and units defective that occurred during the last 2 months of 2027 are as follows. Month Units Sold November 36,000 Give the entry to record the honoring of 500 warranty contracts in January at an average cost of 25. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Swifty Company sells automatic can openers under a 75-day warranty for defective merchandise. Based on past experience, Swifty 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 25. The units sold and units defective that occurred during the last 2 months of 2027 are as follows.
Month Units Sold
November 36,000
Give the entry to record the honoring of 500 warranty contracts in January at an average cost of 25. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Transcript text: Swifty Company sells automatic can openers under a 75 -day warranty for defective merchandise. Based on past experience, Swifty 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 $\$ 25$. The units sold and units defective that occurred during the last 2 months of 2027 are as follows. \begin{tabular}{cccc} \hline Month & & Units Sold & \\ \cline { 1 - 1 } November & & 36,000 & \end{tabular} Give the entry to record the honoring of 500 warranty contracts in January at an average cost of $\$ 25$. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Solution

Solution Steps

Step 1: Calculate Total Cost

To find the total cost of honoring the warranty contracts, we use the formula: \[ \text{Total Cost} = \text{Number of Contracts} \times \text{Cost per Contract} \] Substituting the values: \[ \text{Total Cost} = 500 \times 25 = 12500 \]

Step 2: Prepare Journal Entry

We need to record the transaction in the accounting books. The journal entry will include a debit to the warranty expense and a credit to cash (or accounts payable). The accounts are as follows:

Debit: $ \text{Warranty Expense} $ for $ 12500 $
Credit: $ \text{Cash} $ for $ 12500 $

Step 3: Write the Journal Entry

The final journal entry can be summarized as: