Question

Answer all or dont answer. I will give negative rating,

1. Fees accepted in advance from a client:

a. Do not increase assets.

b. Are recorded as earned revenues on the income statement.

c. None of these answers is correct.

d. Are recorded as liabilities.

e. Increase income.

2.

During 2017, Smith Electronics sold 250 microwaves each at $950 per unit. Each microwave has one year warranty. In Smith estimate, it will cost them $62 per unit, if a unit is brought in under warranty for repair. During 2017, Smith spent $12,500 on warranty costs for the appliances sold in 2017. At the end of the 2017 the warranty liability and the warranty expense related to these sales would be:

a. Warranty liability: 12,500; Warranty expense: 12,500

b. Warranty liability: 3.000; Warranty expense: 12,500

c. Warranty liability: 15,500; Warranty expense: 15,500

d. Warranty liability: 3,000; Warranty expense: 15,500

Answer 1

1. Fees received in advance from client is always recorded as a liabilities i.e. "Advance received from client". Hence answer is C "Recorded as a liabilities."

2. Total Microwaves slold during 2017= 250

Estimated warranty cost for repair ($62*250 unit)= $15,500

Total amount spent as a warranty expense during the year= $12,500

Remaining warranty liability at the end of 2017 ($15,500-$12,500) =$ 3000.

Hence answer is "b" warranty liability :3,000 and warranty expense: 12,500