Question

Problem 13-7 Sage Company sells a machine for $7,120 with a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 500 machines in 2017 (warranty expense is incurred half in 2017 and half in 2018). As a result of product testing, the company estimates that the warranty cost is $355 per machine ($146 parts and $209 labor). Use "Inventory" account to record the warranty expense. Assuming that actual warranty costs are incurred exactly as estimated, what journal entries would be made relative to the following facts? Sale of machinery and warranty expense incurred in 2017. (If no entry is required, select "No Entry" for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit (To record sale) (To record warranty expense) SHOW LIST OF ACCOUNTS

Answer 1

a)

Account Titles and explanations	Debit	credit
Cash ($7,120 × 500)	$3,560,000
Sales		$3,560,000
(To record sales)
Warranty expense	$88,750
Wages and salaries ( 500 × $209 ×50%)		$52,250
Inventory (500 × $146 ×50%)		$36,500
( To record warranty expense)

b) Warranty accural on December 31, 2017

No Journal entry (Cash basis of accounting followed)

C) warranty cost incurred in 2018

Accounts Titles and explanations	Debit	Credit
Warranty expense	$88,750
Wages and salaries (500 × $209 ×50%)		$52,250
Inventory (500 × $146 ×50%)		$36,500
(To record warranty expense)

d) No liability will be disclosed for future warranty cost as of December 31, 2017 assuming sage company adopt cash basis method of accounting.