1.
Journalize the transactions for the year 2016-2018 in the books of Incorporation CA.
1.
Explanation of Solution
Warranty:
Warranty is a written guarantee that is given by the seller to the buyer for the product against product’s defect.
Prepare the
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2016 | Cash or Accounts receivable | 500,000 | |
Sales | 500,000 | ||
(To record the sale revenue) |
Table (1)
- Cash or an account receivable is an asset account and it is increased. Thus, debit cash or accounts receivable with $500,000.
- Sales are a revenue account and it increases the shareholders’ equity. Thus, credit sales with $500,000.
Prepare the journal entry to record the estimated warranty liability for the year 2016:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2016 | Warranty expense (1) | 75,000 | |
Estimated warranty liability | 75,000 | ||
(To record the estimated warranty liability) |
Table (2)
Working note (1):
Determine the amount of estimated warranty liability.
- Warranty expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit warranty expense with $75,000.
- Estimated warranty liability is a liability and it is increased. Thus, credit estimated warranty liability with $75,000.
Prepare the journal entry to record the warranty cost incurred during the year 2016:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2016 | Estimated warranty liability | 62,000 | |
Cash or other assets | 62,000 | ||
(To record the warranty cost incurred during the year) |
Table (3)
- Estimated warranty liability is a liability and it is decreased. Thus, debit estimated warranty liability with $62,000.
- Cash or other asset is an asset account and it is decreased. Thus, credit cash or other assets with $62,000.
Prepare the journal entry to record the sales for the year 2017:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2017 | Cash or Accounts receivable | 650,000 | |
Sales | 650,000 | ||
(To record the sale revenue) |
Table (4)
- Cash or an account receivable is an asset account and it is increased. Thus, debit cash or accounts receivable with $650,000.
- Sales are a revenue account and it increases the shareholders’ equity. Thus, credit sales with $650,000.
Prepare the journal entry to record the estimated warranty liability for the year 2017:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2017 | Warranty expense (2) | 97,500 | |
Estimated warranty liability | 97,500 | ||
(To record the estimated warranty liability) |
Table (5)
Working note (2):
Determine the amount of estimated warranty liability.
- Warranty expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit warranty expense with $97,500.
- Estimated warranty liability is a liability and it is increased. Thus, credit estimated warranty liability with $97,500.
Prepare the journal entry to record the warranty cost incurred during the year 2017:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2017 | Estimated warranty liability | 82,000 | |
Cash or other assets | 82,000 | ||
(To record the warranty cost incurred during the year) |
Table (6)
- Estimated warranty liability is a liability and it is decreased. Thus, debit estimated warranty liability with $82,000.
- Cash or other asset is an asset account and it is decreased. Thus, credit cash or other assets with $82,000.
Prepare the journal entry to record the sales for the year 2018:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2018 | Cash or Accounts receivable | 700,000 | |
Sales | 700,000 | ||
(To record the sale revenue) |
Table (7)
- Cash or an account receivable is an asset account and it is increased. Thus, debit cash or accounts receivable with $700,000.
- Sales are a revenue account and it increases the shareholders’ equity. Thus, credit sales with $700,000.
Prepare the journal entry to record the estimated warranty liability for the year 2018:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2018 | Warranty expense (3) | 105,000 | |
Estimated warranty liability | 105,000 | ||
(To record the estimated warranty liability) |
Table (8)
Working note (3):
Determine the amount of estimated warranty liability.
- Warranty expense is an expense account and it decreases the value of shareholders’ equity. Thus, debit warranty expense with $105,000.
- Estimated warranty liability is a liability and it is increased. Thus, credit estimated warranty liability with $105,000.
Prepare the journal entry to record the warranty cost incurred during the year 2018:
Date | Account titles and explanation | Debit ($) |
Credit ($) |
2018 | Estimated warranty liability | 85,000 | |
Cash or other assets | 85,000 | ||
(To record the warranty cost incurred during the year) |
Table (9)
- Estimated warranty liability is a liability and it is decreased. Thus, debit estimated warranty liability with $85,000.
- Cash or other asset is an asset account and it is decreased. Thus, credit cash or other assets with $85,000.
2.
Determine the amount of liability that would be reported by Incorporation CA on its December 31, 2018 balance sheet.
2.
Explanation of Solution
Liabilities: The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.
Prepare the T-account to determine the amount of estimated warranty liability:
The amount of liability that would be reported by Incorporation CA on its December 31, 2018 balance sheet is $136,700.
3.
Explain the manner in which the financial statements are affected for not recognizing the
3.
Explanation of Solution
According to the recognition principle, recognition of loss contingencies is to record the loss during the current period in which it is incurred. Thus, a loss must be recognized in the same period in which it is incurred and that would result in the probable decrease in an asset or the probable increase in the value of liability. If the loss contingencies are not recognized during the particular period, then it would understate the expense, overstate the earnings, overstate the shareholders’ equity, understate the liabilities in the beginning period and understate the earning of the future period.
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Chapter 9 Solutions
EBK INTERMEDIATE ACCOUNTING: REPORTING
- Assurance-Type Warranty Clean-All Inc. sells washing machines with a 3-year assurance-type warranty. In the past, Clean-All has found that in the year after sale, warranty costs have been 3% of sales; in the second year after sale, 5% of sales; and in the third year after sale, 7% of sales. The following data are also available: Required: 1. Prepare the journal entries for the preceding transactions for 20192021. Closing entries are not required. 2. What amount would Clean-All report as a liability on its December 31, 2021, balance sheet, assuming the liability had a balance of 88,200 on December 31, 2018? 3. Next Level How would the failure to recognize a contingent liability affect the financial statements?arrow_forwardPHAGE COMPANY estimates its annual warranty expense at 4% of net sales. The following balances are given by EUSTASS: Net sales – 1,500,000; warranty liability – balance 12/31/2021 debit (before adjustment) of 10,000; warranty liability - balance 12/31/2021 credit (after adjustment) of 50,000. Which of the following entries was made to record the 2021 estimated warranty expense? a. Warranty expense 60,000 10,000 Retained earnings Warranty liability 50,000 b. Warranty expense Retained earnings Warranty liability 50,000 10,000 60,000 c. Warranty expense Warranty liability 40,000 40,000 d. Warranty expense Warranty liability 60,000 60,000arrow_forwardProduct A comes with a two year warranty when purchased by customers. The estimated warranty costs as a percentage of dollar sales are 3% in the year of sale and 5% in the second year after the sale. The following information relates to sales and warranty expenditures of Product A Actual warranty expenditures $ 10,000 $ 35,000 Year Year 1 Year 2 Sales $400,000 $500,000 Which of the following is NOT part of the required journal entry in Year 1 based on the above information? Multiple Choice Credit cash $10,000 Debit warranty expense $12,000 None of the other alternatives are correct Debit warranty expense $32,000 Credit sales $400,000arrow_forward
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- Required Information Use the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below.] Hitzu Company sold a copier (that costs $5,500) for $11,000 cash with a two-year parts warranty to a customer on August 16 of Year 1. Hitzu expects warranty costs to be 5% of dollar sales. It records warranty expense with an adjusting entry on December 31. On January 5 of Year 2, the copier requires on-site repairs that are completed the same day. The repairs cost $147 for materials taken from the parts inventory. These are the only repairs required in Year 2 for this copier. Exercise 9-13 (Algo) Financial statement Impact of warranty transactions LO P4 Analyze each of the following transactions: (a) the copier's sale: (b) the adjustment to recognize the warranty expense on December 31 of Year 1; and (c) the repairs that occur on January 5 of Year 2. Show each transaction's effect on the accounting equation-specifically. identify the…arrow_forwardMatthews Corporation warrants its products for two years. The estimated product warranty is 5% of sales. Assume that sales were $2,500,000 for 2011. In May of 2012, a customer received warranty repairs requiring $1,185 of parts and $250 of labor. Required: (1) Journalize the adjusting entry required at December 31, 2011 to record the accrued product warranty. (2) Journalize the entry to record the warranty work provided in May of 2012.arrow_forwardLachgar Industries warrants its products for one year. The estimated product warranty is 4% of sales. Assume that sales were $210,000 for June. In July, a customer received warranty repairs requiring $140 of parts and $95 of labor. a. Journalize the adjusting entry required at June 30, the end of the first month of the current fiscal year, to record the accrued product warranty. b. Journalize the entry to record the warranty work provided in July.arrow_forward
- Hall Company sells merchandise with a one-year warranty. In the current year, sales consist of 4,413 units. It is estimated that warranty repairs will average $15 per unit sold and 30% of the repairs will be made in the current year and 70% in the next year. In the current year's income statement, Hall should show warranty expense of a.$0 b.$66,195 c.$46,337 d.$19,859arrow_forwardA company manufactures electronic equipment and offers a one-year warranty with each unit sold. For the year, the company sold 25,000 units. Based on historical averages, management expects 4% of the units sold will need warranty work. The estimated warranty cost per unit is $100.Required:Estimate (a) the number of units that will need warranty work and (b) future warranty costs. (c) Prepare the year-end adjusting entry for estimated warranty costs, assuming none of the units sold in the current year required warranty work. (d) Alternatively, prepare the year-end adjusting entry for estimated warranty costs, assuming that 25% of the estimated warranty work has already occurred by the end of the current year. How would your answers change if management’s estimate of warranty work increases to 5% of units sold and the estimated warranty cost per unit increases to $120?arrow_forwardAccounting for warranty expense and warranty payable The accounting records of Sculpted Ceramics included the following at January 1,2018: In the past, Sculpted’s warranty expense has been 9% of sales. During 2018, Sculpted made sales of $113,000 and paid $7,000 to satisfy warranty Claims. Requirements Journalize Sculpted’s warranty expense and warranty payments during 2018. Explanations are not required. What balance of Estimated Warranty Payable will Sculpted report on its balance sheet at December 31, 2018?arrow_forward
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