Q1. For Year 1, Pac Co. has a standard assurance-type warranty on its equipment. It estimated its 2-year equipment warranty costs based on $100 per unit sold in Year 1. Experience during Year 2 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported: In Year 2 income from continuing operations. As a cumulative amount, net of tax, below Year 2 income from continuing operations. As an accounting change retrospectively applied to Year 1 financial statements. As a correction of an error requiring Year 1 financial statements to be re

Q1. For Year 1, Pac Co. has a standard assurance-type warranty on its equipment. It estimated its 2-year equipment warranty costs based on $100 per unit sold in Year 1. Experience during Year 2 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported: In Year 2 income from continuing operations. As a cumulative amount, net of tax, below Year 2 income from continuing operations. As an accounting change retrospectively applied to Year 1 financial statements. As a correction of an error requiring Year 1 financial statements to be re

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter18: Accounting For Income Taxes

Section: Chapter Questions

Problem 3RE: In the current year, Madison Corporation had 50,000 of taxable income at a tax rate of 25%. During...

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In the current year, Madison Corporation had 50,000 of taxable income at a tax rate of 25%. During the year, Madison began offering warranties on its products and has a Warranty liability for financial reporting purposes of 5,000 at the end of the year. Warranty expenses are not deductible until paid for income tax purposes. Prepare the journal entry to record Madisons income taxes at the end of the year.
In Year 1, a company has revenues of $600,000 and expenses of $400,000. Of theexpenses, $70,000 represents a warranty on a company product. However, the companyonly paid $30,000 as a result of this warranty. The remainder is expected to be paid in afuture year in which company officials believe there is a 60% chance that the companywill have taxable income to be reduced by this warranty cost. The relevant tax rate is30% for Year 1 and 32% for periods after that. What is the total amount of income tax expense to be recognized in Year 1?
In 20X1, Stevens Corp. began a new product line of wearable technology that carries a 24-month warranty against manufacturer defects. Based on industry experience, Stevens expects warranty costs to be an amount equal to approximately 9% of total sales dollars. During 20X1, new sales of this technology totaled $3,000,000. The costs incurred to satisfy warranty claims in 20X1 was $90,000. Required: Answer the following two questions. Question #1: What should Stevens report as the "Warranty Expense" balance on its 20X1 income statement?Answer: Question #2: What should Stevens report as the "Warranty Liability" balance on its balance sheet at 12/31/X1?Answer
During Year 1, Ward Company introduced a new product carrying a two-year warranty against defects, which is included in the selling price of the product. The estimated warranty costs are 2% of sales within the first 12 months following the sale and 4% in the second 12 months following the sale. Sales and actual warranty expenditures for the years ended December 31 of Year 1 and Year 2 follow. Actual Warranty Sales Expenditures Year 1 $1,200,000 $18,000 Year 2 2,000,000 60,000 $1,600,000 $39,000 Required a. Record the entries in Year 1 to (1) record actual cash warranty costs and (2) accrue for warranties at year-end. Date Account Name Dr. Cr. a. Dec. 31 Year 1 To record actual warranty costs. Dec. 31 Year 1 To accrue for warranty expense. b. At December 31 Year 1, what would Ward report as estimated warranty liability on its balance sheet? $Answer c. Record the entries in Year 2 to (1) record…
Haeir Co. sells washing machines that carry a three-year warranty against manufacturer's defects. Based on the entity's experience, warranty costs are estimated at P 300 per machine. During the current year, the entity sold 2,400 washing machines and paid warranty costs of P 170,000. What amount should be reported as warranty expense for the years? What amount should be reported as warranty liability at year-end? respectively * A.P 720,000 and P 170,000 B.P 170,000 and P 720,000 C.P 240,000 and P 550,000 D.P 720,000 and P 550,000
An entity started business in 2021. It sells printers with a three-year warranty. The entity estimated its warranty cost as percentage of peso sales. Based on the past experience, it is estimated that 3% will be repaired during the year of warranty, 5%will be repaired during the special year of warranty and 10% will be in the third year. In 2021 and 2022, the entity was able to sell 7,500 and 10,000 units, respectively at a selling price of P4,000 per unit. The entity also incurred repair cost of P800,000 and P2,400,000 in 2021 and 2022 respectively. Sales and repair occur evenly throughout the period What is the unadjusted warranty expense for 2022? What is the unadjusted warranty liability for December 31, 2022? What is the adjusted warranty liability after testing its adequacy? What is the adjusted warranty expense for 2022?
Milan Company, a manufacturer of heavy machinery, grants a four-year warranty on its products. The Estimated Liability for Product Warranty account shows the following transactions for the year:Opening Balance P45,000Provision (made at interim dates) 20,000P65,000Cost of servicing claims (12,000)Ending balance (before adjustment) P53,000A review of unsettled claims and the companys experience indicates that claims have averaged 2% of net sales per year.The following additional information is available from the companys records at the end of the current year: Gross Sales P2,040,000Sales returns and allowances 40,000Cost of goods sold P1,350,000 Requirements: Prepare any necessary adjusting journal entries, giving effect to the proper accounting treatment of product warranties. Support any entries with clearly detailed computations. The book shave not been closed. Identify the amount of the expense included in the determination of net income and the amount of the liability presented in…
During 2021, JJJ Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:Sales / Actual Warranty / Expenditures2021 / 600,000 / 9,0002022 / 1,500,000 / 65,0002023 / 2,100,000 / 135,000What amount should JJJ report as a liability at December 31, 2023?
Bizarre Company gives warranties at the time of sale to purchasers of its product. The entity undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. Sales of P10,000,000 were made evenly throughout 2011. The expenditures for warranty repairs and replacements for the products sold in 2011 are expected to be made 50% in 2011 and 50% in 2012. The 2012 outflows of economic benefits related to the warranty will take place on June 30, 2012. Experience indicates that 95% of products sold require no warranty repairs, 3% of products sold require minor repairs costing 10% of the sale price, and 2% of products sold require major repairs or replacement costing 90% of sale price. The appropriate discount factor for cash flows expected to occur on June 30, 2012 is 0.95. An appropriate risk adjustment factor to reflect the uncertainties in the cash flow estimates is an increment of 6% to the probability-weighted expected…
At the beginning of the 2021, Titanic Corp. sold 50 units of a merchandise for the year for a total sales price of P3,000,000. These merchandise come with a two year warranty for defects. During the year, the company incurred actual warranty cost at P55,000 Your audit investigation revealed that this transaction was reported in the statement of comprehensive income as Sales at P3,000,000 and warranty expense at P55,000. Assuming that the warranty is considered assurance-type as this is typical to nature of the product being sold, and assuming further that the company estimates that 80% of the units sold shall be returned for the warranty program and that the company shall incur P2,100 in labor and materials cost for each unit returned, what is the correct amount of sales to be reported in the SCI for the period and balance of liability to be reported in the SFP as at the end of 2021? A. 3,000,000 and 84,000. B. 3,000,000 and 29,000 C. 2,880,000 and 29,000 D. 2, 500, 000 and…
East Corp. manufactures stereo systems that carry a two-year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period.During 2005, stereo system sales totaled $3,000,000, and warranty costs of $67,500 were incurred.In its income statement for the year ended December 31, 2005, East should report warranty expense of: $67,500 $120,000 $60,000 $52,500 wance as a part of stockholders' equity. In the income statement.
Part A: This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers' life insurance policies with Gumowski as beneficiary. Instructions a. Indicate where deferred income taxes are reported in the financial statements. b. Specify when deferred income taxes would need to be recognized for each of the items above, and indicate the rationale for such recognition. Part B: Gumowski Company's president has heard that deferred income taxes can be classified in different ways in the balance sheet. Instructions Identify the conditions under which deferred income taxes would be classified as a noncurrent item in the balance sheet. What justification exists for such classification?