Employees earn vacation pay at a rate of one day per month. During December, 20

Question

Employees earn vacation pay at a rate of one day per month. During December, 20 employees qualify for one vacation day each. Their average daily wage is $160 per employee.

During December, Maxum Company sold 12,000 units of a product that carries a 60-day warranty. December sales for this product total $460,000. The company expects 10% of the units to need warranty repairs, and it estimates the average repair cost per unit will be $15.

Prepare any necessary adjusting entries at December 31, 2013, for Maxum Company’s year-end financial statements for each of the above separate transactions and events.

Explanation / Answer

1. In case of payment of vacations to employees, it creates expense as well as liability for employer. Firstly we will pass entry for liability creation by debiting Vacation Expense $3200 and credit Vacation Liability by $3200.

Secondly, to record the payment of vacation expense we will record following entry ie debit Vacation Liability by $3200 and credit Cash/ bank A/c by $3200.

Note: The Amount has been computed by multiplying No. of employees eligible for vacation with average daily wage.

2. When the company is working under warranty coverage, the warranty liability shall be reduced. In this case Maxum Company shall firstly pass entry to create liability by debiting Warranty expense $ 1800 and credit warranty liability by $1800. Note : Calculation of above amount is No. of Units expected to be repair multiplied by average repair cost per unit.

To elabrate further if suppose out of 120 units, 100 units are claimed under warranty then the company shall pass entry for payment by Debiting Warranty Liabiity by $1500 and crediting Cash / Bank Account by $1500.

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