Question

During 2019 Canada Computer Company sold computers for $100,000 which includes a 2-year warranty. Warranties sold separately for $70,000 that requires the company to perform periodic services and to replace defective parts. In 2020, Canada Computer Company incurred actual warranty costs relative to 2019 computer sales of $5,000 for parts and $12,000 for labor.                                                                                             

Instructions

(a) Using the revenue warranty approach, prepare the entries to reflect the above transactions for 2019 and 2020, assuming Canada co. earn any unearned warranties equally over warranty life.

(b) The transactions of part (a) create what balance under current liabilities in the Dec 31, 2019 balance sheet?

Answer 1

Journal Entries ($)

2019	Accounts Receivables Dr	100,000
	To Sales		100,000
	(Being the sales for the year)
	Warranty expense Dr	70,000
	To Warranty Liability		70,000
	(waranty liability accrued for 2 years recognised under revenue warranty apporach)
2020	Warranty Liability Dr	17,000
	To Inventory		5,000
	To Accrued Payroll expenses		12,000
	(actual expenses for the year)

The transaction will appear in the balance sheet as following:

1. Current Liability => $ 70,000/2 years = $ 35,000
2. Non-current liability ie balance => $ 35,000