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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Warranties

Lincoln Repairs and Detailing has recently opened its doors to provide quality auto repair services. To encourage business, Lincoln offers a 9-month warranty on all repairs. The following data are available for 2019:

Chapter 8, Problem 79APSA, Warranties Lincoln Repairs and Detailing has recently opened its doors to provide quality auto

Assume that warranty claims are paid in cash.

Required:

1. Compute the warranty expense for 2019.

2. Prepare the entry to record the payment of the 2019 warranty claims.

3. CONCEPTUAL CONNECTION What is the December 31, 2019, balance in the estimated warranty liability account? Why has the balance in the warranty liability account changed from January 1, 2019?

To determine

(a)

Introduction:

Warranty claims are expected in the future but they should be recorded as warranty expense in year of sale as it helped in generating the revenue.

To calculate:

Warranty Expense for year 2019.

Explanation

Transmission repaired in 2019 = 1,980

Estimated cost of each warranty claim = $220

Frequency of warranty claim = 0.05 per repaid

Warranty Expense for the year 2019 can be calculated as follows:

Transmission repaired × Estimated cost ofx

To determine

(b)

Introduction:

Warranty claims are expected in the future but they should be recorded as warranty expense in year of sale as it helped in generating the revenue.

To record:

Payment made towards warranty claims.

To determine

(c)

Introduction:

Warranty claims are expected in the future but they should be recorded as warranty expense in year of sale as it helped in generating the revenue.

To show:

Balance in warranty liability account along with the reasons.

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