Lark Associates manufactures and distributes component parts for car audio syste
ID: 2445034 • Letter: L
Question
Lark Associates manufactures and distributes component parts for car audio systems. Lark's assurance -type warranty covers all repair costs, including parts and labor, for two years after the date of sale. During the current year, Lark sold $4,000.000 of component parts to several manufacturers of car audio systems. The company estimates that warranty costs will be 4% of sales. Lark did not make any repairs in the year of the sale. However, during the following year, the company incurred $56.000 in warranty claims. The repair costs include $32.000 in parts and $24,000 in labor (unpaid). Lark uses the accrual -basis to account for its assurance type warranty costs. What journal entries are necessary to record these transactions? ?Explanation / Answer
Answer: Journal Entry:
Dr Warranty Expense $160000
Cr Provision for warranties $160000
To record estimated liability of 4% of sales
Provision for warranties A/C Dr. $56000
To merchandise inventory A/C $32000
To labor A/C $24000
Actual warranty liability A/C dr. $56000
To cash A/C $56000
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