Calculating Southeast Plumbing's Estimated Warranty Expense

What is the estimated warranty expense for Southeast Plumbing based on its cash sales?

A. debit Estimated warranty payable, $21,960; credit Warranty expense, $21,960.

B. debit Warranty expense, $21,960; credit Estimated warranty payable, $21,960.

C. debit Warranty expense, $21,960; credit Sales revenue, $21,960.

D. debit Warranty expense, $21,960; credit Cash, $21,960.

Answer:

The correct journal entry to record Southeast Plumbing's estimated warranty expense of 3% of cash sales is a debit to Warranty Expense and a credit to Estimated Warranty Payable for $21,960.

Southeast Plumbing had cash sales for the month totaling $732,000. Southeast offers a 6-month warranty on its services and estimates that warranty claims will equal 3% of sales. To calculate the estimated warranty expense for the month, we need to find 3% of $732,000, which amounts to $21,960.

The journal entry to record this estimated warranty expense is a debit to Warranty Expense for $21,960 and a credit to Estimated Warranty Payable for $21,960. This entry follows the matching principle, which recognizes the expense in the same period as the associated revenue.