Question

Jacks sales sells photocopiers and provides parts and services to its customers. The company has 30 employees and provide employees with a benefit plan. You are the controller and are looking at the liability section of the balance sheet and have identified several areas for consideration.

For each of the areas answer the related questions assuming private entity GAAP is used. Indicate how your answer would be different if the company used IFRS.

1. The company includes a new shredder warranty with each shredder that it sells. The company sold 140 new shredders at total sales revenue of $800,000. Included with the sales are warranties which you estimate to be worth 12% of the sales price and provide two years of coverage. You are interested in knowing the difference to the bottom line of using the assurance (expense) approach and the service (revenue) approach. The company expects actual warranty costs be $80,000. Actual costs incurred in year one are $24,000.
   1. Show all the journal for the sales and the warranty using the assurance (expense) method.
   2. Show all the journal entries for the sales and the warranty using the service (revenue) method.
   3. Compare the net income under each method.

Answer 1

A)Journal entry for assurance type:
Description	Debit	Credit
Sale of shredders:
Cash a/c ($800000/140)	800,000
Sales a/c		800,000
Recognition of warranty expense:
Warranty expenses	80,000
Estimed warranty liability		80,000
Incured warranty costs for Year 1
Estimed warranted liability	24,000
Cash		24,000

B)Journal entry for service type:
Description	Debit	Credit
Sale of shredders:
Accounts receivable	800,000
Sales		704,000
Unearned warranty revenue( $800,000*12%)		96,000
Recognition of warranty expense:
Warranty expenses	24,000
Cash		24,000
Unearned warranty revenue (96000/2)	48,000
Warranty revenue		48,000

c) Comparision:-

Net Income:- Assurance type
Sales	800,000
Less; Warranty expenses	(24,000)
	776,000

Net Income:-
Sales	704,000
Add: Warranty revenue	48,000
Less; Warranty expenses	(24,000)
	728,000