Blue Corporation sells computers under a 2-year warranty contract that requires

Question

Blue Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2017, the corporation sells for cash 392 computers at a unit price of $2,590. On the basis of past experience, the 2-year warranty costs are estimated to be $141 for parts and $191 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.

Account Titles and Explanation

Debit

Credit

Blue Corporation
Balance Sheet (Partial)
December 31, 2017

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Account Titles and Explanation

Debit

Credit

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Blue Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2017, the corporation sells for cash 392 computers at a unit price of $2,590. On the basis of past experience, the 2-year warranty costs are estimated to be $141 for parts and $191 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.

Explanation / Answer

Journal Entry Date Account Tittle & Explanation Debit Credit 31/12/2017 Cash (392X $2590) $1,015,280 Sales Revenue $1,015,280 To Record Sales Revenue 31/12/2017 Estimated Warranty Expense ($141+$191)X392 $130,144 Estimated Warrnaty liability $130,144 To Record Estimated Warranty Expense & Liability Balance Sheet ( partial) Liability Relative to these transaction would appear on the Dec31,2017 Balance Sheet $130,144 Current Liability $65,072 Long Term liability $65,072 Journal Entry Date Account Tittle & Explanation Debit Credit 2018 Estimated Warrnaty liability $64,530 Merchandised Inventory $22,310 Wages Payable/Cash $42,220 To Record Actual Warranty Cost

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