Question

Pr. 13-156—Warranties. 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 gives 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

Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
31-Dec-17	Cash account			18,00,000
	Sales revenue				18,00,000
	(for sale of computers)
31-Dec-17	Warranty expense			1,20,000
	Estimated warranty liabilities (1200*100)		1,20,000
	(for accrual of warranty)
2018	Estimated warranty liabilities		40,000
	Merchandise inventory			16000
	Cash account				24000
	(for incurring the actual warranty expense)
Req b:
Current liabilities (2017)
Estimated warranty liabilities		1,20,000