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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Service-Type Warranty Wright Machinery Corporation manufactures automobile engines for major automobile producers. The engines sell for $920 per engine. In addition, customers have the option to purchase a service-type warranty for $73 per engine that protects against any defects for a period of 5 years. During 2019, Wright sold 8,000 engines to National Motors. National Motors purchased warranties on all of the engines purchased. During 2019, Wright repaired defective motors at a cost of $94,400.

Required:

Prepare the journal entries for the preceding transactions.

To determine

Prepare necessary entries to record the given transaction.

Explanation

Liabilities:

The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Warranty Liability:

Estimated liability is an exact dollar amount of debt or obligation which is valued at a later date. Product warranty liability is an example of estimated liability. Here, liability toward the customer can be estimated only when the warranty is honored.

Prepare necessary entries to record the sales made.

DateAccount Titles and explanationDebit ($)Credit ($)
Cash 7,944,000 
      Sales (8000×$920) 7,360,000
      Unearned warranty revenue (8000×$73) 584,000
 (To record the sales made )  

Table (1)

  • Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $7,944,000.
  • Sales are component of stockholder’s equity and there is an increase in the value revenue. Hence, credit the sales by $7,360,000.
  • Unearned warranty revenue is a liability and there is an increase in the value of liability. Hence, credit the unearned warranty revenue by $584,000

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