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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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Service-Type Warranties On August 1, 2019, Pereira Corporation has sold 1,600 Wiglows to Mendez Company at $450 each. Mendez also purchased a 1-year service-type warranty on all the Wiglows for $12 per unit. In 2019, Pereira incurred warranty costs of $9,200. Costs for 2020 were $7,000.

Required:

  1. 1. Prepare the journal entries for the preceding transactions.
  2. 2. Show how Pereira would report the items on the December 31, 2019, balance sheet.

1.

To determine

Prepare the journal entries to record the service type warranties.

Explanation

Warranty:

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

Prepare journal entry to record the sale of 1,600 instruments during August-December 2019:

DateAccounts and ExplanationDebit ($)Credit ($)
Cash  ($462×1,600) 739,200 
Sales($450×1,600) 720,000
 Unearned Warranty Revenue ($12×1,600)  19,200
 (To record the sales)  

Table (1)

  • Cash is an asset account and it is increased. Therefore, debit cash account with $739,200.
  • Sales are a revenue account and it increases the value of shareholders’ equity. Therefore, credit sales with $720,000.
  • Unearned warranty revenue is a liability account and it is increased. Therefore, credit unearned warranty revenue with $19,200.

Prepare the journal entry to record the recognition of warranty expense for August-December 2019:

DateAccounts and ExplanationDebit ($)Credit ($)
Warranty Expense9,200 
     Cash 9,200
 (To record the warranty expense)  

Table (2)

  • Warranty expense is an expense account and it decreases the value of shareholders’ equity. Therefore, debit warranty expense with $9,200.
  • Cash is an asset account and it is decreased. Therefore, credit cash with $9,200

2.

To determine

Determine the amount that would be reported as unearned warranty revenue on the financial statement.

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