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Chapter 13: Q6P (page 700)

Dos Passos Company sells televisions at an average price of \(900 and also offers to each customer a separate 3-year warranty contract for \)90 that requires the company to perform periodic services and to replacedefective parts. During 2017, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3-year warrantycosts as \(20 for parts and \)40 for labor, and accounts for warranties separately. Assume sales occurred on December 31,2017, and straight-line recognition of warranty revenues occurs.

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 beclassified?

In 2018, Dos Passos Company incurred actual costs relative to 2017 television warranty sales of \(2,000 for parts and \)4,000 forlabor.

(c) Record any necessary journal entries in 2018 relative to 2017 television warranties.

(d) What amounts relative to the 2017 television warranties would appear on the December 31, 2018, balance sheet andhow would they be classified?

Short Answer

Expert verified

(a) Cash will be debited by $294,300 and unearned warranty revenue will be credited by $24,300, and sales revenue by $270,000.

(b)Unearned warranty revenue of $8,100 in current liabilities, and $16,200 in long-term liabilities

(c) Unearned warranty revenue will be debited and warranty revenue will be credited by $8,100, respectively.

Warranty expense will be debited by $6,000, inventory will be credited by $2,000 and salaries and wages payable will be credited by $4,000.

(d) Unearned warranty revenue of $8,100 in current liabilities, and $8,100 in long-term liabilities

Step by step solution

01

(a) Journal entry

Date

Accounts & Explanations

Debit

Credit

Dec.31,2017

Cash (300 x $900)+(270 x $90)

$294,300

Unearned Warranty Revenue

$24,300

Sales revenue

$270,000

To record sales revenue and unearned warranty revenue

02

(b) Partial balance sheet

Current Liabilities

Unearned Warranty Revenue

($24,300 / 3)

$8,100

Long-term Liabilities

Unearned Warranty Revenue ($24,300 x 2/3)

$16,200

Total

$24,300

03

(c) Journal entry

Date

Accounts & Explanations

Debit

Credit

2018

Unearned Warranty Revenue

$8,100

Warranty revenue ($24,300 / 3)

$8,100

To record warranty revenue

2018

Warranty Expense

$6,000

Inventory

$2,000

Salaries and Wages Payable

$4,000

To record warranty expense

04

(d) Partial balance sheet

Current Liabilities

Unearned Warranty Revenue

($24,300 / 3)

$8,100

Long-term Liabilities

Unearned Warranty Revenue ($24,300 - $8,100 - $8,100)

$8,100

Total

$16,200

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Most popular questions from this chapter

Mayaguez Corporation provides its officers with bonuses based on net income. For 2017, the bonuses total $350,000 and are paid on February 15, 2018. Prepare Mayaguez鈥檚 December 31, 2017, adjusting entry and the February 15,2018, entry.

(Fair Value Hedge) On January 2, 2017, MacCloud Co. issued a 4-year, \(100,000 note at 6% fixed interest, interest

payable semiannually. MacCloud now wants to change the note to a variable-rate note.

As a result, on January 2, 2017, MacCloud Co. enters into an interest rate swap where it agrees to receive 6% fixed and pay

LIBOR of 5.7% for the first 6 months on \)100,000. At each 6-month period, the variable rate will be reset. The variable rate is reset

to 6.7% on June 30, 2017.

Instructions

(a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2017.

(b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2017

How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.

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

Instar Company has several investments in the securities of other companies. The following information regarding these investmentsis available at December 31, 2017.

1. Instar holds bonds issued by Dorsel Corp. The bonds have an amortized cost of \(320,000 and their fair value at December31, 2017, is \)400,000. Instar intends to hold the bonds until they mature on December 31, 2025.

2. Instar has invested idle cash in the equity securities of several publicly traded companies. Instar intends to sell these securitiesduring the first quarter of 2018, when it will need the cash to acquire seasonal inventory. These equity securities havea cost basis of \(800,000 and a fair value of \)920,000 at December 31, 2017.

3. Instar has a significant ownership stake in one of the companies that supplies Instar with various components Instar usesin its products. Instar owns 6% of the common stock of the supplier, does not have any representation on the supplier鈥檚board of directors, does not exchange any personnel with the supplier, and does not consult with the supplier on any of

the supplier鈥檚 operating, financial, or strategic decisions. The cost basis of the investment in the supplier is \(1,200,000 andthe fair value of the investment at December 31, 2017, is \)1,550,000. Instar does not intend to sell the investment in theforeseeable future. The supplier reported net income of \(80,000 for 2017 and paid no dividends.

4. Instar owns some common stock of Forter Corp. The cost basis of the investment in Forter is \)200,000 and the fair value atDecember 31, 2017, is \(50,000. Instar believes the decline in the value of its investment in Forter is permanent and thereforeimpaired, but Instar does not intend to sell its investment in Forter in the foreseeable future.

5. Instar purchased 25% of the stock of Slobbaer Co. for \)900,000. Instar has significant influence over the operating activitiesof Slobbaer Co. During 2017, Slobbaer Co. reported net income of \(300,000 and paid a dividend of \)100,000.

Accounting

(a) Determine how each of the investments described above should be classified and accounted far.

(b) Prepare any December 31, 2017, journal entries needed for Instar relating to Instar鈥檚 various investments in other companies.

Assume 2017 is Instar鈥檚 first year of operations.

Analysis

What is the effect on Instar鈥檚 2017 net income (as reported on Instar鈥檚 income statement) of Instar鈥檚 investments in other companies?
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