Exercise 9-7A Effect of warranty obligations and payments on financial statement

Question

Exercise 9-7A Effect of warranty obligations and payments on financial statements LO 9-4 The Chair Company provides a 120-day parts-and-labor warranty on all merchandise it sells. The Chair Company estimates the warranty expense for the current period to be $2,650. During the period a customer returned a product that cost $1,830 to repair.

Show the effects of these transactions on the financial statements using a horizontal statements model like the example shown here. Use "+" for increase, "" for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). (Leave no cells blank - be certain to select "NA" wherever required.)

Prepare the journal entry to record the warranty expense for the period. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Prepare the journal entry to record payment for the actual repair costs. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Required:

Explanation / Answer

a)

b)Warranty expense      debit     2650

warranty liability          credit    2650

[being expense recorded for period ]

c) Warranty liability       debit     1830

   cash                        credit     1830

[Being expense paid in cash ]

Balance sheet Income statement cash flow statement Asset = Liability + shareholdered equity Revenue - Expense Net income 1 NA +2650 -2650 NA + 2650 -2650 Operating activity 2 -1830 -1830 NA NA NA NA Operating activity

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