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Chapter 13: 5P (page 658)

(Warranties) Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2017, the corporation sells for cash 400 computers at a unit price of \(2,500. On the basis of past experience, the 2-year warranty costs are estimated to be \)155 for parts and \(185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.

Instructions

(a) Record any necessary journal entries in 2017.

(b) What liability relative to these transactions would appear on the December 31, 2017, balance sheet and how would it be classified?

(c) In 2018, the actual warranty costs to Brooks Corporation were \)21,400 for parts and $39,900 for labor. Record any necessary journal entries in 2018.

Short Answer

Expert verified
  1. Both sides of the journal totals $1,136,000.
  2. Current liability and long-term liability of$68,000 each.
  3. Both sides of the journal totals$61,300.

Step by step solution

01

Definition of Warranty Liability

The liability account that reports estimated expenses that a business entity will incur for the repair and replacement of faulty products is known as warranty liability.

02

Necessary Journal entries

Date

Accounts and Explanation

Debit $

Credit $

1

Cash$2,500脳400

$1,000,000

Sales revenue

$1,000,000

2

Warranty expenses

data-custom-editor="chemistry" $185+$155脳400

$136,000

Warranty liability

$136,000

$1,136,000

$1,136,000

03

Liability on 31 December 2017 Balance sheet

Balance sheet

Particular

Amount $

Current liability:

Warranty liability

$68,000

Long-term liability

Warranty liability

$68,000

04

Necessary journal entries in 2018

Date

Accounts and Explanation

Debit $

Credit $

1

Warranty liability

$61,300

Inventory

$21,400

Salaries and wages payable

$39,900

$61,300

$61,300

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Most popular questions from this chapter

BE13-4 (L01) Sport Pro Magazine sold 12,000 annual subscriptions on August 1, 2017, for $18 each. Prepare Sport Pro鈥檚 August 1, 2017, journal entry and the December 31, 2017, annual adjusting entry, assuming the magazines are published and delivered monthly.

Question: E13-1 (L01) (Balance Sheet Classification of Various Liabilities) How would each of the following items be reported on the balance sheet? (a) Accrued vacation pay. (j) Premium offers outstanding. (b) Estimated taxes payable. (k) Discount on notes payable. (c) Service warranties on appliance sales. (l) Personal injury claim pending. (d) Bank overdraft. (m) Current maturities of long-term debts to be paid (e) Employee payroll deductions unremitted. from current assets. (f) Unpaid bonus to officers. (n) Cash dividends declared but unpaid. (g) Deposit received from customer to guarantee (o) Dividends in arrears on preferred stock. performance of a contract. (p) Loans from officers. (h) Sales taxes payable. (i) Gift certificates sold to customers but not yet redeemed.

Under what conditions should a short-term obligation be excluded from current liabilities?

Presented below are two different situations related to Mckee Corporation鈥檚 debt obligation. Mckee鈥檚 next financial reporting date is December 31, 2017. The financial statements are authorized for issuance on March 1, 2018.

  1. Mckee has a long-term obligation of \(400,000, which is maturing over 4 years in the amount of \)100,000 per year. The obligation is dated November 1, 2017, and the first maturity date is November 1, 2018.
  2. Mckee has a short-term obligation due February 15, 2018. Its lender agrees to extend the credit to the maturity date of this loan to February 15, 2018. The agreement for extension is signed on January 15, 2018.

Instructions

Indicate how each of these debt obligations is reported on McKee鈥檚 statement of financial position on December 31, 2017.

(Loss Contingencies: Entries and Essays) Polska Corporation, in preparation of its December 31, 2017, financial statements, is attempting to determine the proper accounting treatment for each of the following situations.

1. As a result of uninsured accidents during the year, personal injury suits for \(350,000 and \)60,000 have been filed against the company. It is the judgment of Polska鈥檚 legal counsel that an unfavorable outcome is unlikely in the \(60,000 case but that an unfavorable verdict approximating \)250,000 will probably result in the \(350,000 case.

2. Polska owns a subsidiary in a foreign country that has a book value of \)5,725,000 and an estimated fair value of \(9,500,000. The foreign government has communicated to Polska its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same country, Polska expects to receive 40% of the fair value of its properties as final settlement.

3. Polska鈥檚 chemical product division consisting of five plants is uninsurable because of the special risk of injury to employees and losses due to fire and explosion. The year 2017 is considered one of the safest (luckiest) in the division鈥檚 history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the past decade (ranging from \)60,000 to $700,000), management is certain that next year the company will probably not be so fortunate.

Instructions

(a) Prepare the journal entries that should be recorded as of December 31, 2017, to recognize each of the situations above.

(b) Indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain why.
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