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Chapter 13: 7P (page 658)

Alvarado Company sells a machine for \(7,400 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2017 (warranty expense is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the total warranty cost is \)390 per machine (\(170 parts and \)220 labor).

Instructions

Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

(a) Sale of machinery and warranty expense incurred in 2017.

(b) Warranty accrual on December 31, 2017.

(c) Warranty costs incurred in 2018.

(d) What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2017?

Short Answer

Expert verified

(a) Cash will be debited and sales revenue will be credited by $4,440,000, respectively.

Warranty expense will be debited and Cash, Inventory, Accrued Payroll will be credited by $117,000, respectively.

(b) Warranty expense will be debited and warranty payable will be credited by $117,000, respectively.

(c) Warranty expense will be debited and Cash, Inventory, Accrued Payroll will be credited by $117,000, respectively.

(d) As of December 31, 2017, a Warranty payable of $117,000 will be reported under current liability in the balance sheet.

Step by step solution

01

(a) Journal entry

Date

Accounts & Explanations

Debit

Credit

2017

Cash (600 x $7,400)

$4,440,000

Sales Revenue

$4,440,000

To record sales revenue

2017

Warranty Expense ((600 x $390) / 2)

$117,000

Cash, Inventory, Accrued Payroll

$117,000

To record warranty expense

02

(b) Journal entry

Date

Accounts & Explanations

Debit

Credit

Dec. 31, 2017

Warranty Expense ((600 x $390) / 2)

$117,000

Warranty Liability

$117,000

To record accrued warranty expense

03

(c) Journal entry

Date

Accounts & Explanations

Debit

Credit

2018

Warranty Expense ((600 x $390) / 2)

$117,000

Cash, Inventory, Accrued Payroll

$117,000

To record warranty expense

04

(d) Reporting on balance sheet

In the balance sheet, half of the total warranty expense of $234,000 will be reported as current liability-related warranty liability. Hence, $117,000 would be reported as warranty liability.

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Most popular questions from this chapter

Question: What factors must be considered in determining whether or not to record a liability for pending litigation? For threatened litigation?

(Available-for-Sale Debt Securities Entries and Financial Statement Presentation) At December 31, 2017, the

available-for-sale debt portfolio for Steffi Graf, Inc. is as follows.

Security Cost Fair Value Unrealized Gain (Loss)

A \(17,500 \)15,000 (\(2,500)

B 12,500 14,000 1,500

C 23,000 25,500 2,500

Total \)53,000 \(54,500 1,500

Previous fair value adjustment balance鈥擠r. 400

Fair value adjustment鈥擠r. \)1,100

On January 20, 2018, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees.

Instructions

(a) Prepare the adjusting entry at December 31, 2017, to report the portfolio at fair value.

(b) Show the balance sheet presentation of the investment-related accounts at December 31, 2017. (Ignore notes presentation.)

(c) Prepare the journal entry for the 2018 sale of security A

Schmitt Company must make computations and adjusting entries for the following independent situations at December 31, 2018.

1. Its line of amplifiers carries a 3-year warranty against defects. On the basis of past experience the estimated warranty costs related to dollar sales are first year after sale鈥�2% of sales revenue; second year after sale鈥�3% of sales revenue; and third year after sale鈥�5% of sales revenue. Sales and actual warranty expenditures for the first 3 years of business were:

Sales Revenue

Warranty Expenditures

2016

\(800,000

\)6,500

2017

1,100,000

17,200

2018

1,200,000

62,000

Instructions

Compute the amount that Schmitt should report as a liability in its December 31, 2018, balance sheet. Assume that all sales are made evenly throughout each year with warranty expenses also evenly spaced relative to the rates above.

2. With some of its products, Schmitt includes coupons that are redeemable in merchandise. The coupons have no expiration date and, in the company鈥檚 experience, 40% of them are redeemed. The liability for unredeemed coupons at December 31, 2017, was \(9,000. During 2018, coupons worth \)30,000 were issued, and merchandise worth $8,000 was distributed in exchange for coupons redeemed.

Instructions

Compute the amount of the liability that should appear on the December 31, 2018, balance sheet

Under what conditions must an employer accrue a liability for the cost of compensated absences?

The payroll of Yellowcard Company for September 2016 is as follows. Total payroll was \(480,000, of which \)110,000 is exempt from Social Security tax because it represented amounts paid in excess of \(118,500 to certain employees. The amount paid to employees in excess of \)7,000 was \(400,000. Income taxes in the amount of \)80,000 were withheld, as was \(9,000 in union dues. The state unemployment tax is 3.5%, but Yellowcard Company is allowed a credit of 2.3% by the state for its unemployment experience. Also, assume that the current FICA tax is 7.65% on an employee鈥檚 wages to \)118,500 and 1.45% in excess of \(118,500. No employee for Yellowcard makes more than \)125,000. The federal unemployment tax rate is 0.8% after state credit.

Instructions

Prepare the necessary journal entries if the wages and salaries paid and the employer payroll taxes are recorded separately.
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