Computers Galore Ltd. sells computers, computer accessories, and software. On it

Question

Computers Galore Ltd. sells computers, computer accessories, and software. On its computer sales, the company provides a one-month warranty that is included in the cost of the computer. Claims under the warranties vary from replacing defective parts to providing customers with new computers if repairs cannot be made. During 2016, the estimated cost related to the one-month warranties was $42,000, of which $37,700 had been incurred before year end. For an additional charge of $90, Computers Galore also offers extended warranty coverage for two years on its computers. This amount is expected to cover the costs associated with the extended warranties. During 2016, Computers Galore sold 870 two-year warranties. The costs incurred during the year for repairs and replacements under these warranties amounted to $32,900. Based on past experience, the company estimates that its total warranty costs over the two-year coverage period will be $59,500. Prepare journal entries to record the warranty transactions for 2016. (Enter debit entries first followed by credit entries. Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 14,674.) No. Account and explanation Debit Credit 1. (To record estimated cost related to 1 month warranties.) 2. (To record cost incurred related to 1 month warranties.) 3. (To record sale of 2 year extended warranties.) 4. To record cost incurred related to 2 year extended warranties.) 5. To record service revenue.)

Explanation / Answer

No. Account and Explanations Debit ($) Credit ($) 1 Warranty Cost          42,000 Provision for warranties          42,000 (To record estimate cost related to 1 month warranties) 2 Provision for warranties          37,700 Cash/Bank          37,700 (To record cost incurred related to 1 month warranties) 3 Cash/Bank          78,300 Provision for warranties          78,300 (To record sale of 2 year warranties) 4 Provision for warranties          32,900 Cash/Bank          32,900 (To record cost incurred related to 2 year warranty) 5 Provision for warranties          18,800 Service Revenue          18,800 (to record service revenue) ($ 78,300 - $ 59,500)

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