A company that offers a warranty with its product is incurring a contingent liability that usually meets the criteria for recording the liability and disclosing it in the notes to the financial statements. The existing condition is the selling of the product that includes a warranty. The unknown outcome is whether the product will require incurring warranty costs. The future event is the customer requesting warranty work. The chance of loss happening is probable. By looking at past records, the company can reasonably estimate the number of items that will require warranty work and the average cost of each repair.

In 2010, Pacioli Company had sales of 400,000 skateboards. Previous records indicate that approximately 4% of the skateboards are returned during the warranty period. Warranty work per unit averages $50.

In January 2011, Pacioli incurred warranty expense of $5,000. Pacioli sends all of its warranty work out to a third party. Therefore, all warranty costs are incurred in cash.

Record the estimated warranty expense for 2010 and the warranty work costs incurred in 2011.

If an amount box does not require an entry, leave it blank or enter "0".

(In a general journal)