Question

On August 1, 2016, Pereira Corporation has sold, on account, 1,600 Wiglows to Mendez Company at $450 each. Mendez also purchased a 1-year service-type warranty on all the Wiglows for $12 per unit. In 2016, Pereira incurred warranty costs of $9,200. Costs for 2017 were $7,000.

Required:

Prepare the necessary journal entries to record:

1. the sale of Wiglows and service warranty on account on August 1, 2016

2. the warranty costs paid during 2016

3. the warranty revenue earned in 2016

4. the warranty costs paid during 2017

5. the warranty revenue earned in 2017

Show how Pereira would report the items on the December 31, 2016, balance sheet.

Answer 1

	Date	General Journal	Debit	Credit
1	Aug. 1, 2016	Cash	739200
		Sales revenue (1600 x $450)		720000
		Unearned warranty revenue (1600 x $12)		19200
		(To record sale of Wiglows and service warranty)
2	2016	Warranty expense	9200
		Cash		9200
		(To record warranty costs paid)
3	Dec. 31, 2016	Unearned warranty revenue	8000
		Warranty revenue ($19200 x 5/12)		8000
		(To record warranty revenue earned)
4	2017	Warranty expense	7000
		Cash		7000
		(To record warranty costs paid)
5	Dec. 31, 2017	Unearned warranty revenue	11200
		Warranty revenue ($19200 x 7/12)		11200
		(To record warranty revenue earned)

Pereira Corporation
Balance Sheet (Partial)
December 31, 2016
Current liabilities
Unearned warranty revenue	11200