Question

Merritt Equipment Company sells computers for $1,300 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 950 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor. (Assume sales all occur at December 31, 2017.)

In 2018, Merritt incurred actual warranty costs relative to 2017 computer sales of $12,400 for parts and $18,600 for labor.

Part 1

Under the expense warranty approach, give the entries to reflect the above transactions (accrual method) for 2017 and 2018. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
2017
	(To record sale of computers)
2017
	(To record liability against warranty costs)
2018

List of Accounts

Part 2

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

Current Liabilities- ______________________

$

Answer 1

Date	Account Titles	Debit	Credit
2017	Accounts Receivable (950 * $1300)	$1235000
	Sales Revenue		$1235000
	(To record sale of computers)
2017	Warranty Expense ($60 + $40) * 950	$95000
	Warranty Liability		$95000
	(To record liability against warranty costs)
2018	Warranty Liability	$31000
	Inventory		$12400
	Cash, Inventory, Accrued Payroll		$18600

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

Total warranty Liability at the end of 2017 = $95000

This warranty is for 1 year

But current liability only consider for 1 year i.e = $95000/2 = $47500