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Chapter 13: Question 22Q (page 691)

Explain the accounting for an assurance-type warranty.

Short Answer

Expert verified

It is accounted for as a warranty expense account debited, and the liability account is credited due at the time of the product sold. Since it is a warranty given for the functioning of the product, it does not account for the separate performance obligation. If it was purchased for a separate price with or without a warranty, then it鈥檚 considered as a separately priced extended warranty or product maintenance contract under GAAP.

Step by step solution

01

Definition of Assurance Type Warranty

Assurance type warranties are those warranties that promise to customers that the delivered product is functioning as per specifications or guides provided at the time of purchase.

02

About Assurance-type warranty

Assurance Type Warranty is the warranty that is specified in the delivered product and functionality agreement; no transaction value is specified for it.

Accrue the warranty expense with a debit to the warranty expense account and a credit to the warranty liability account. As actual warranty claims are received, debit the warranty liability account and credit the inventory account for the cost of replacement parts and products sent to the customers.

Example: A sells TV with a 12-month warranty which assures that it is intended to work for that 12month period. The warranty is not sold separately.

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Most popular questions from this chapter

BE13-10 (L03) Scorcese Inc. is involved in a lawsuit at December 31, 2017. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.

Question: Explain how trading debt securities are accounted for and reported?

Question: (Equity Investments) Castleman Holdings, Inc. had the following equity investment portfolio at

January 1, 2017.

Evers Company 1,000 shares @ \(15 each \)15,000

Rogers Company 900 shares @ \(20 each 18,000

Chance Company 500 shares @ \)9 each 4,500

Equity investments @ cost 37,500

Fair value adjustment (7,500)

Equity investments @ fair value \(30,000

During 2017, the following transactions took place.

1. On March 1, Rogers Company paid a \)2 per share dividend.

2. On April 30, Castleman Holdings, Inc. sold 300 shares of Chance Company for \(11 per share.

3. On May 15, Castleman Holdings, Inc. purchased 100 more shares of Evers Company stock at \)16 per share.

4. On December 31, 2017, the stocks had the following price per share values: Evers \(17, Rogers \)19, and Chance \(8.

During 2018, the following transactions took place.

5. On February 1, Castleman Holdings, Inc. sold the remaining Chance shares for \)8 per share.

6. On March 1, Rogers Company paid a \(2 per share dividend.

7. On December 21, Evers Company declared a cash dividend of \)3 per share to be paid in the next month.

8. On December 31, 2018, the stocks had the following price per share values: Evers \(19 and Rogers \)21.

Instructions

(a) Prepare journal entries for each of the above transactions.

(b) Prepare a partial balance sheet showing the investment-related amounts to be reported on December 31, 2017, and 2018.

L (Liability Entries and Adjustments) Listed below are selected transactions of Schultz Department Store for the current year ending December 31.

1. On December 5, the store received \(500 from the Selig Players as a deposit to be returned after certain furniture to be used in stage production was returned on January 15.

2. During December, cash sales totaled \)798,000, which includes the 5% sales tax that must be remitted to the state by the fifteenth day of the following month.

3. On December 10, the store purchased for cash three delivery trucks for \(120,000. The trucks were purchased in a state that applies a 5% sales tax.

4. The store determined it will cost \)100,000 to restore the area (considered a land improvement) surrounding one of its store parking lots, when the store is closed in 2 years. Schultz estimates the fair value of the obligation at December 31 is $84,000.

Instructions

Prepare all the journal entries necessary to record the transactions noted above as they occurred and any adjusting journal entries relative to the transactions that would be required to present fair financial statements at December 31. Date each entry. For simplicity, assume that adjusting entries are recorded only once a year on December 31.

Wynn Company offers a set of building blocks to customers who send in 3 UPC codes from Wynn cereal, along with 50垄. The block sets cost Wynn $1.10 each to purchase and 60垄 each to mail to customers. During 2017, Wynn sold 1,200,000 boxes of cereal. The company expects 30% of the UPC codes to be sent in. During 2017, 120,000 UPC codes were redeemed. Prepare Wynn鈥檚 December 31, 2017, adjusting entry.
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