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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

(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.

Grant Company has had a record-breaking year in terms of growth in sales and profitability. However, market research indicates that it will experience operating losses in two of its major businesses next year. The controller has proposed that the company record a provision for these future losses this year, since it can afford to take the charge and still show good results. Advise the controller on the appropriateness of this charge

Greco Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows.

GRECO RESORT

TRIAL BALANCE

AUGUST 31, 2017

Debit

Credit

Cash

\( 19,600

Prepaid Insurance

4,500

Supplies

2,600

Land

20,000

Buildings

120,000

Equipment

16,000

Accounts Payable

\) 4,500

Unearned Rent Revenue

4,600

Mortgage Payable

60,000

Common Stock

91,000

Retained Earnings

9,000

Dividends

5,000

Rent Revenue

76,200

Salaries and Wages Expense

44,800

Utilities Expenses

9,200

Maintenance and Repairs Expense

3,600

\(245,300

\)245,300

Other data:

  1. The balance in prepaid insurance is a one-year premium paid on June 1, 2017.
  2. An inventory count on August 31 shows \(450 of supplies on hand.
  3. Annual depreciation rates are buildings (4%) and equipment (10%). Salvage value is estimated to be 10% of cost.
  4. Unearned Rent Revenue of \)3,800 was earned prior to August 31.
  5. Salaries of \(375 were unpaid at August 31.
  6. Rentals of \)800 were due from tenants at August 31.
  7. The mortgage interest rate is 8% per year.

Instructions

(a) Journalize the adjusting entries on August 31 for the 3-month period June 1鈥揂ugust 31. (Omit explanations.)

(b) Prepare an adjusted trial balance on August 31.

BE13-7 (L01) Kasten Inc. provides paid vacations to its employees. At December 31, 2017, 30 employees have each earned 2 weeks of vacation time. The employees鈥� average salary is $500 per week. Prepare Kasten鈥檚 December 31, 2017, adjusting entry.

BE 13-13(L03) Streep Factory provides a 2-year warranty with one of its products which was first sold in 2017. Streep sold \(1,000,000 of products subject to the warranty. Streep expects \)125,000 of warranty costs over the next 2 years. In that year, Streep spent $70,000 servicing warranty claims. Prepare Streep鈥檚 journal entry to record the sales (ignore cost of goods sold) and the December 31 adjusting entry, assuming the expenditures are inventory costs.
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