please answer correctly. Alvarado Company sells a machine for $8,090 with a 12-m
ID: 2498550 • Letter: P
Question
please answer correctly.
Alvarado Company sells a machine for $8,090 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 860 machines in 2014 (warranty expense is incurred half in 2014 and half in 2015). As a result of product testing, the company estimates that the warranty cost is $580 per machine ($262 parts and $318 labor). Use "Inventory" account to record the warranty expense.
Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?
Under application of the cash-basis method for:
Warranty costs incurred in 2015.
No.
Account Titles and Explanation
Debit
Credit
Show List of Accounts
Link to Text
(1) Sale of machinery in 2014. (2) Warranty costs incurred in 2014. (3) Warranty expense charged against 2014 revenues. (4)Warranty costs incurred in 2015.
No.
Account Titles and Explanation
Debit
Credit
(1) (2) (3) (4)Show List of Accounts
Link to Text
Explanation / Answer
(1) Sale of machinery in 2014 = 860 x $8090 = $6957400
(2) Warranty cost incurred in 2014 = half of the warranty cost for the sale of 860 machines in 2014 (as the other half will be incurred in 2015)
As the actual cost of warranty is found to be exactly as estimated,
Warranty Cost Incurred in 2014 = 0.5 x 860 x $ 580 = $249400
(3) Warranty expense charged against 2014 revenue = estimated warranty expense for the number of machines sold in 2014 (maching concept) = $580 x 860 = $ 498800
(4) Assuming that the company sold the same number of machines in 2015, the warranty cost that would be incurred and paid in 2015 = paid for half of the warranty expense for the 2014 sale + half of the warranty expense for the ,machines sold in 2015 = 249400 + 249400 = $498800
Serial No. Account Title and explanation Debit ($) Credit ($) 1) Cash 6957400 Sales Revenue 6957400 (860 machines sold in 2014 @ $8090 per machine in cash recorded) 2) Warranty expense 249400 Cash 249400 (warranty expense in 2014 for half of the 860 machines sold incurred and recorded) 3) Sales revenue 498800 Warranty expense 249400 Estimated Warranty liability 249400 (Warranty expense incurred in 2014 and estimated warranty liability for half of the machine charged against sales revenue) 4) Warranty expense 249400 Estimated warranty liability 249400 cash 498800 (in 2015, half of the warranty expense incurred for the machines sold in 2014 and hence charged against the estimated warranty payable. The other half of the warranty expense was incurred and paid for in 2015)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.