Question

Merritt Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 1,200 computers.
Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor per unit.
(Assume sales all occur at December 31, 2017.)

In 2018, Merritt incurred actual warranty costs relative to 2017 computer sales of $16,000 for parts and $24,000 for labor.

Instructions

(a) Record give the entries to reflect the above transactions (accrual method) for 2017 and 2018.

(b) The transactions of part (a) create what balance under current liabilities in the 2017 balance sheet?

Answer 1

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

a).

Journal Entry

On 2017  

Accounts receivable A/c($1,500 × $1,200)    Dr. $1,800,000

To sales A/c           $1,800,000

(Being sale of computers is recorded)  

For recording this we debited the account receivable as it increased the assets and at the same time it also increased the revenue so the sales is credited

On 2017  

Warranty expense A/c {($60+$40) × $1,200}    Dr.  $120,000

To warrant liability A/c      $120,000

(Being the warranty expense is recorded)  

For recording this we debited the warranty expense as it increased the expenses and at the same time it also increase the liability so the warranty liability is credited

On 2018  

Warranty liability A/c             Dr.  $40,000

       To Cash A/c        $24,000

To Inventory A/c       $16,000

(Being the warranty liability is recorded)  

For recording this we debited the warranty liability as it reduced the liability and credited the cash and inventory as it reduced the assets

b). Balance under current liabilities in 2017 balance sheet is

= $120,000 × 1 ÷ 2

= $60,000  

As it is for two years so we take for one year only

Answer 2

a) The journal entries that Merritt Equipment Company will record to reflect the transactions for 2017 and 2018 are as follows:

Journal Entries:

Dec. 31, 2017:

Debit Cash $1,800,000

Credit Sales Revenue $1,800,000

• To record the sale of 1,200 computers at $1,500 each.

Debit Warranty Expenses $120,000

Credit Warranty Liability $120,000

• To record the warranty expenses and liability for the sales above.

2018:

Debit Warranty Liability $40,000

Credit Parts Inventory $16,000

Credit Salaries $24,000

• To record the actual Warranty Liability incurred for 2017.

b) The transactions of part (a) create Warranty Liabilities under the current liabilities section of the 2017 balance sheet.

Data Analysis:

Dec. 31, 2017:

Cash $1,800,000 Sales Revenue $1,800,000

Warranty Expenses $120,000 Warranty Liability $120,000 (1,200 x $40 + 1,200 x $60)

2018: Warranty Liability $40,000 Parts Inventory $16,000 Salaries $24,000

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