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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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Assurance-Type Warranties On September 1, 2019, Carolina Electronics Company has 1,000 Blu-ray players ready for sale. On October 1, 2019, 900 are sold at $125 each with a 1-year assurance-type warranty. Carolina estimates that the warranty cost on each Blu-ray player sold will probably average $10 per unit. During the final 3 months of 2019, Carolina incurred warranty costs of $4,000, and in 2020 warranty costs were $5,000.

Required:

  1. 1. Prepare the journal entries for the preceding transactions.
  2. 2. Show how the preceding items would be reported oil the December 31, 2019, balance sheet.
  3. 3. Prepare the journal entries for the preceding transactions using the modified cash basis method.
  4. 4. Next Level Which method produces the better measure of income: Why?

1

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.

Prepare necessary entries to record the sales made.

DateAccount Titles and explanationDebit ($)Credit ($)
October 1, 2019Accounts  receivable (900×$125) 112,500 
      Sales 112,500
 (To record the sales made )  

Table (1)

  • Accounts receivable is an asset and there is an increase in the value of an asset. Hence, debit the accounts receivable by $112,500.
  • Sales are component of stockholder’s equity and there is an increase in the value revenue. Hence, credit the sales by $112,500.

Prepare necessary entries to record the warranty expense estimated on sales made.

DateAccount Titles and explanationDebit ($)Credit ($)
October 1,2019Warranty expense (900×$10) 9,000 
      Estimated warranty liability 9,000
 (To record the estimated  warranty  liability)  

Table (2)

  • Warranty expense is a component of stockholder’s equity and there is an increase in the value of expense

2.

To determine

Show the effect of the given transaction on the balance sheet of Company C for the year ended December 31, 2019.

3.

To determine

Prepare necessary entries to record the given transaction by using modified cash basis.

4.

To determine

Identify the method that produces the better measure of income.

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