The Captian company began operations on January 1, 2016. In 2016, Captain\'s sal

Question

The Captian company began operations on January 1, 2016. In 2016, Captain's sales were $400,000, and payments arising out of warranty obligations were $18,000.

Required:

a. Assume that this is an assurance-type warranty and $0.10 of warranty cost will be incurred for each $1.00 of sales. Prepare the 2016 journal entry(ies) for warranty expense and payments using the modified cash basis.

b. Assume that this is an assurance-type warranty and $0.10 of warranty cost will be incurred for each $1.00 of sales. Prepare the 2016 journal entry(ies) for warranty expense and payments using the GAAP approach which requires that the warranty expense (and the related liability) be accrued in the period of the sale.

c. Assume that this is a service-type warranty and $0.10 of each $1.00 of sales represents warranty revenue. Prepare the 2016 journal entries related to product sales and warranty activities.

Explanation / Answer

Answer (a)

(1) Warranty expense 18000

cash 18000

Answer (b)

(1)   Warranty expense 40000

Estimated Liability under warranties 40000  

(2)    Estimated Liability under warranties 18000

Cash 18000

Answer (c)

(1) Cash / Accounts Receivable 400000

Sales 360000

Unearned Warranty Revenue 40000

(2) Warranty expense 18000

cash 18000

(3)    Unearned Warranty Revenue 18000

Warranty Revenue 18000

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