1. Prepare journal entries to record (a) the cost of cell phones replaced under warranty and (b) the estimated liability for product warranties for cell phones sold during the month. 2. Compute the balance of the Estimated Product Warranty Liability account at the end of the month. 3. If the company's product warranty liability is underestimated, what are the effects on current and future years' income?

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Chapter5: Activity-based Costing And Management
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In the below attached question, can I please get some clarification:

In part a shouldn't the Merchandise Inventory be credited and the Estimated Product Warranty Liability debited be 60,000. Representing the full cost of replacing the cellphones as it actually cost 60,000 to replace the phones, thus decreasing merchandise inventory by 60,000. Is this not an adjusting entry to account for the actual amount of warranty liability and merchandise inventory decreasing?

The second transaction in b would then contain the amount of $20,160 to estimate for the potential warranty liability for the month.

Thank you very much.

a. The cost of cell phones replaced under warranty:
Date
Account Title
Debit
Credit
Sep
Cash
$
9,860
Estimated product warranty liability
Service revenue
Merchandise inventory
$
20,160
$
9,860
$
20,160
|(to record estimated product warranty)
Working:
Estimated liability for product warranty=(2, 800 × 0.03) × $240
=84 x $240
=$20, 160
Step 2
b. The estimate liability for product warranties for cell phones sold during the month:
Date
Account Title
Debit
Credit
Sep
Product warranty expense
$
60,000
Estimated product warranty liability
|(to record estimated product warranty)
$
60,000
%24
Transcribed Image Text:a. The cost of cell phones replaced under warranty: Date Account Title Debit Credit Sep Cash $ 9,860 Estimated product warranty liability Service revenue Merchandise inventory $ 20,160 $ 9,860 $ 20,160 |(to record estimated product warranty) Working: Estimated liability for product warranty=(2, 800 × 0.03) × $240 =84 x $240 =$20, 160 Step 2 b. The estimate liability for product warranties for cell phones sold during the month: Date Account Title Debit Credit Sep Product warranty expense $ 60,000 Estimated product warranty liability |(to record estimated product warranty) $ 60,000 %24
Reliance Company manufactures and sells wireless video cell
phones, which it guarantees for five years. It a cell phone tails, it is
replaced free, but the customer is charged a service fee for
handling. In the past, management has found that only 3 percent of
the cell phones sold required replacement under the warranty. The
average cell phone costs the company $240. At the beginning of
September, the account for estimated liability for product
warranties had a credit balance of $208,000. During September, 250
cell phones were returned under the warranty. The company
collected $9,860 of service fees for handling. During the month, the
company sold 2,800 cell phones.
REQUIRED
1. Prepare journal entries to record (a) the cost of cell phones
replaced under warranty and (b) the estimated liability for
product warranties for cell phones sold during the month.
2. Compute the balance of the Estimated Product Warranty
Liability account at the end of the month.
3. If the company's product warranty liability is
underestimated, what are the effects on current and future
years' income?
Transcribed Image Text:Reliance Company manufactures and sells wireless video cell phones, which it guarantees for five years. It a cell phone tails, it is replaced free, but the customer is charged a service fee for handling. In the past, management has found that only 3 percent of the cell phones sold required replacement under the warranty. The average cell phone costs the company $240. At the beginning of September, the account for estimated liability for product warranties had a credit balance of $208,000. During September, 250 cell phones were returned under the warranty. The company collected $9,860 of service fees for handling. During the month, the company sold 2,800 cell phones. REQUIRED 1. Prepare journal entries to record (a) the cost of cell phones replaced under warranty and (b) the estimated liability for product warranties for cell phones sold during the month. 2. Compute the balance of the Estimated Product Warranty Liability account at the end of the month. 3. If the company's product warranty liability is underestimated, what are the effects on current and future years' income?
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