Question

Cheyenne Machinery Corporation sold manufacturing equipment for $2,560 each. Each machine carried with it a 2-year warranty against manufacturing defects. From experience, Cheyenne Machinery Corporation determined that each machine sold would average $350 in replacement parts. In 2017, the company sold 1,050 machines. Also in 2017, the company incurred $178,550 in total repair costs (the cost of replacement parts from inventory). Cheyenne Machinery Corporation also sold an extended warranty for its machines. For $660, customers could purchase an extended warranty that extended the warranty on the machine for an additional 2 years. 900 of the customers that bought machines also purchased the extended warranty.

Using the Revenue Approach, prepare the journal entry to record the year-end adjusting entries at December 31, 2017, assuming Cheyenne’s year-end is December 31 for the assurance-type warranties.

Answer 1

Answer:

Journal entry is as follows:

Date	Account Description	Debit	Credit
31-Dec	Warranty Expenses	$188,950
	Estimated Warranty Liability		$188,950
	(Being Provision for Warranty Expenses Created)

Here, warranty expenses debited with $188,950 for provision.

Working:

Warranty expenses = ($350 * 1,050) - $178,550

= $367,500 - $178,550

= $188,950