Warranty Liability, Assurance-Type Warranty, Service-Type Warranty. Michael and Sons, Ltd. sells lawn and garden products for home use. The company offers an assurance-type warranty that covers all repair costs, including parts and labor, for 1 year after the date of sale of lawn tractors. Michael also sells a service-type warranty contract that covers all parts and labor for 5 years after the date of sale of lawn tractors. In the year in which it sold the products, the company sold 8,000 service-type warranties at a price of $175 per contract and received cash. Michael and Sons sold the contracts at the end of the year and did not recognize warranty revenue in the year of the sale. Michael and Sons did not make any actual repairs in the year of the sale during the base warranty period. During the following year, the company incurred $98,100 in actual warranty claims that are now covered only under the service-type warranty contract. The repair costs included $61,000 in parts and $37,100 in labor (unpaid). Prepare the
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Intermediate Accounting (2nd Edition)
- Assurance-Type Warranty Clean-All Inc. sells washing machines with a 3-year assurance-type warranty. In the past, Clean-All has found that in the year after sale, warranty costs have been 3% of sales; in the second year after sale, 5% of sales; and in the third year after sale, 7% of sales. The following data are also available: Required: 1. Prepare the journal entries for the preceding transactions for 20192021. Closing entries are not required. 2. What amount would Clean-All report as a liability on its December 31, 2021, balance sheet, assuming the liability had a balance of 88,200 on December 31, 2018? 3. Next Level How would the failure to recognize a contingent liability affect the financial statements?arrow_forwardShoe Hut sells custom, handmade shoes. It offers a one-year warranty on all shoes for repair or replacement. Review each of the transactions and prepare any necessary journal entries for each situation. A. May 31: Shoe Hut sells 100 pairs of shoes during the month of May at a sales price per pair of shoes of $240 cash. Shoe Hut records warranty estimates when sales are recognized and bases warranty estimates on 4% of sales. B. June 2: A customer files a warranty claim that Shoe Hut honors in the amount of $30 for repair to laces. Laces Inventory corresponds to shoelace inventory used for repairs. C. June 4: Another customer files a warranty claim that Shoe Hut honors. Shoe Hut replaces the damaged shoes at a cost of $200, affecting their Shoe Replacement Inventory account. D. August 10: Shoe Hut explores the possibility of bankruptcy, given the current economic conditions (recession). It determines the bankruptcy is unlikely to occur (remote).arrow_forwardCarnes Electronics sells consumer electronics that carry a 90-day manufacturer’s warranty. At the time of purchase, customers are offered the opportunity to also buy a two-year extended warranty for an additional charge. During the year, Carnes received $428,000 for these extended warranties (approximately evenly throughout the year). 2. Prepare journal entries that summarize sales of the extended warranties and any aspects of the warranty that should be recorded during the year.arrow_forward
- A company manufactures electronic equipment and offers a one-year warranty with each unit sold. For the year, the company sold 25,000 units. Based on historical averages, management expects 4% of the units sold will need warranty work. The estimated warranty cost per unit is $100.Required:Estimate (a) the number of units that will need warranty work and (b) future warranty costs. (c) Prepare the year-end adjusting entry for estimated warranty costs, assuming none of the units sold in the current year required warranty work. (d) Alternatively, prepare the year-end adjusting entry for estimated warranty costs, assuming that 25% of the estimated warranty work has already occurred by the end of the current year. How would your answers change if management’s estimate of warranty work increases to 5% of units sold and the estimated warranty cost per unit increases to $120?arrow_forwardDuring 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…arrow_forwardA company sells its product subject to a warranty that covers the cost of parts for repairs during the six months after the date of sale. Warranty costs are estimated to be 6% of sales. During the month of June, the company performed warranty work and used $12,000 worth of parts to do the warranty work. Sales for June amounted to $450,000.a. Record the warranty expense for the month of June.b. Record the costs of the warranty work completed in June.c. If the Estimated Warranty Liability account had a credit balance of $10,000 on May 31, what is the account balance at June 30? Debit Credit a. b. c.arrow_forward
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