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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Landcaster Inc. sells its products with a 2-year service-type warranty. In Year 1, Landcaster sells 60 machines for $2,500 each. Landcaster determines that the machines normally sell for $2,275 each and the service-type warranty could be purchased for $225 per machine. In Year 1, Landcaster pays $5,000 for warranty costs. Prepare Landcaster’s journal entries related to the sales and warranty in Year 1.

To determine

Prepare the journal entries that are related to the sales and warranty in Year1 for Incorporation L.

Explanation

Warranty:

Warranty is a written gurantee that is given by the seller to the buyer for the product against product’s defect.

Prepare journal entry to record the sales in Year 1 for Incorporation L:

DateAccounts and ExplanationDebit ($)Credit ($)
Year 1Cash 150,000 
 Sales(60×$2,275)   136,500
 Unearned Warranty Revenue (60×$225)  13,500
 (To record the sales for Year 1)  

Table (1)

  • Cash is an asset account and it is increased. Therefore, debit cash account with $150,000.
  • Sales are a revenue account and it increases the value of shareholders’ equity. Therefore, credit sales with $136,500.
  • Unearned warranty revenue is a liability account and it is increased. Therefore, credit unearned warranty revenue with $13,500

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