Warranties: Miley Equipment Company sells computers for $1,500 each and also giv
ID: 2442713 • Letter: W
Question
Warranties:
Miley Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2010, the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $30 for parts and $60 labor. (Assume all sales all occur at December 31, 2010.)
In 2011, Miley incurred actual warranty costs relative to 2010 computer sales of $10,000 for parts and $18,000 for labor.
a) Under the expense warranty treatment give the entries to reflect the above transactions (accrual method) for 2010 and 2011.
b) The transactions of part (a) create what balance under current liabilities in the 2010 balance sheet?
Explanation / Answer
Answer : Total estimated warranty cost per computer = 30 +60 = $ 90
Total estimated warranty cost = 700*90 = $ 63000 for 2 years
Journal entries for 2010 on accrual method
Account name Debit Credit
Warranty expenses 63000
Warranty liability 63000
Journal entries for 2011 on accrual method
Account name Debit Credit
Warranty Liabilty 28000
cash 28000
(10000 for parts & 18000 for labor)
Journal entries for 2010 on Cash Basis
No enteries be passed in 2010.
Journal entries for 2011 on Cash Basis
Account name Debit Credit
Warranty Expenses 28000
cash 28000
(10000 for parts & 18000 for labor)
Answer Liabilities create under balance sheet of 2010 is $ 63000 as per journal enteries passed in ournal entries for 2010 on accrual method.
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