Star Company has recently launched a new model of consumer car. Its cars are sold with a three-year warranty for manufacturing defects. Past experience of similar models indicates that about 10% of the cars sold are with some defects, of which 4% are minor defects, 3% are normal defects and 3% are major defects. For the year ended December 31, 2011, the company sold 10,000 units of the new model. The following information relates to the estimate of costs of defects associated with the new model: Major defects P7,000 5,000 2,000 Cost of repair/unit High Probability 30% Minor defects Normal defects P1,500 P4,000 Medium 1,200 3,000 1,500 60% Low 10% 1,000 What amount of provision should the company recognize for the year ended December 31, 2011? c. P1,590,000 d. P3,043,000 a. None b. P1,445,000

Star Company has recently launched a new model of consumer car. Its cars are sold with a three-year warranty for manufacturing defects. Past experience of similar models indicates that about 10% of the cars sold are with some defects, of which 4% are minor defects, 3% are normal defects and 3% are major defects. For the year ended December 31, 2011, the company sold 10,000 units of the new model. The following information relates to the estimate of costs of defects associated with the new model: Major defects P7,000 5,000 2,000 Cost of repair/unit High Probability 30% Minor defects Normal defects P1,500 P4,000 Medium 1,200 3,000 1,500 60% Low 10% 1,000 What amount of provision should the company recognize for the year ended December 31, 2011? c. P1,590,000 d. P3,043,000 a. None b. P1,445,000

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

Chapter17: Advanced Issues In Revenue Recognition

Section: Chapter Questions

Problem 6MC

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Clearview Company manufactures and sells high-quality television sets. The most popular line sells for $1,000 each and is accompanied by a three-year warranty to repair, free of charge, any defective unit. Average costs to repair each defective unit will be $90 for replacement parts and $60 for labor. Clearview estimates that warranty costs of $12,600 will be incurred during 2012. The company actually sold 600 television sets and incurred replacement part costs of $3,600 and labor costs of $5,400 during the year. The adjusted 2012 ending balance in the Estimated Liability for Warranties account is $10,200. Required1. How many defective units from this year's sales does Clearview Company estimatewill be returned for repair?2. What percentage of sales does Clearview Company estimate will be returned forrepair?3. What steps should Clearview take if actual warranty costs incurred during 2013 aresignificantly higher than the estimated liability recorded at the end of 2012?
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[The following information applies to the questions displayed below.] Computer Wholesalers restores and resells notebook computers. It originally acquires the notebook computers from corporations upgrading their computer systems, and it backs each notebook it sells with a 90-day warranty against defects. Based on previous experience, Computer Wholesalers expects warranty costs to be approximately 6% of sales. Sales for the month of December are $570,000. Actual warranty expenditures in January of the following year were $21,500. Required:1. Does this situation represent a contingent liability?
Jewellery Limited manufactures and sells different kinds of handmade fine jewellery. The company warrants its products for one year. The average price per piece of jewellery is $5,000 and the company sold 800 products in 2018. By the end of 2018, based on historical information the company estimates 5% of the jewellery sold to develop defective parts within one year. The estimated average cost of warranty repairs per defective item is $100. During 2019, customers have returned 20 pieces of jewellery sold that year for repairs. By the end of 2019, the company expects 7% of the jewellery sold to develop defective parts within one year. The estimated average cost of warranty repairs per defective item is $120. The company sold 900 products in 2019 with the same average price per piece of 5,000. The balance day of Jewellery Limited is 31 December. Record the necessary journal entries in 2018 and 2019 regarding the warranty.
[The following information applies to the questions displayed below.] Computer Wholesalers restores and resells notebook computers. It originally acquires the notebook computers from corporations upgrading their computer systems, and it backs each notebook it sells with a 90-day warranty against defects. Based on previous experience, Computer Wholesalers expects warranty costs to be approximately 6% of sales. Sales for the month of December are $570,000. Actual warranty expenditures in January of the following year were $21,500. 4. What is the balance in the Warranty Liability account after the entries in Part 2 and 3?