Question

Problem 13-7

Cheyenne Company sells a machine for $6,840 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 620 machines in 2017 (warranty expense is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the warranty cost is $384 per machine ($170 parts and $214 labor). Use "Inventory" account to record the warranty expense.

Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts?

Sale of machinery and warranty expense incurred in 2017.

Warranty accrual on December 31, 2017.

Warranty costs incurred in 2018.

What amount, if any, is disclosed in the balance sheet as a liability for future warranty costs as of December 31, 2017?

Answer 1

Journal entries:
S.n.	Accounts title and explanations				Debit $	Credit $
a.	Accounts receivabe Ddr.				4240800
	Sales revenue					4240800
	warranty expense Dr.				119040
	Cash account (620*214*1/2)					66340
	Inventory account (620*170*1/2)					52700
b.	Warranty expenses Dr.				119040
	Warranty expenses payable					119040
c.	warranty expense Dr.				119040
	Cash account (620*214*1/2)					66340
	Inventory account (620*170*1/2)					52700
Balance Sheet:
Current liabilities:
Warranty expenses payable				119040