Understanding Recording Warranty Expenses at Diamond Electronics

What entry will Diamond Electronics record on December 31, Year 1, related to warranty expenses?

The correct entry that Diamond Electronics will record on December 31, Year 1, related to warranty expenses is a debit to Warranty Expense for $4,800. This amount represents the estimated cost of honoring warranties for the products sold during the month of December.

Explanation:

Diamond Electronics sells previously owned electronics and each product comes with a one-year warranty against defects. In this scenario, the company's total product sales for the month of December amount to $80,000. The company expects future warranty costs to be 6% of sales, which means they anticipate spending $4,800 on warranty claims based on the December sales figure.

Therefore, on December 31, Year 1, the company will make a debit entry to the Warranty Expense account for $4,800. This entry reflects the recognition of the estimated warranty expense for the products sold in December. It is essential for the company to account for these expected costs accurately to properly reflect their financial position.

It is important to note that there is no need to make a debit or credit entry to the Warranty Liability account on December 31 because the liability for future warranty claims has not yet been incurred. The warranty liability will be recorded when actual warranty claims are made by customers in the future.